LPG cap: A case for expanding the experiment

The income-based method of distributing subsidy for LPG is aimed at covering the most deserving ones. The Indian Express analyses the viability of the method in distribution of other important items.

Written by Sunny Verma | Updated: January 5, 2016 6:00:54 am
(Illustration by: C R Sasikumar) Experts say the government should first start with DBT and then move towards an income-based subsidy regime, just as it has been done in the case of LPG. (Illustration by: C R Sasikumar)

The government last month undertook a key reform announcing income-based subsidy for LPG cylinders. The oil ministry said that the taxpayers with an annual income of over Rs 10 lakh will not get subsidised LPG cylinders starting January 2016. The government estimates this would lead to an annual savings of Rs 300 crore.

The government has already started the direct benefit transfer (DBT) of LPG subsidy into the beneficiary bank accounts. DBT in case of LPG results in an estimated savings of Rs 14,672 crore in a year, as per the oil ministry data.

Plans are afoot to start DBT for kerosene subsidy from April 1 in selected districts of eight states Rajasthan, Punjab, Haryana, Himachal Pradesh, Chhattisgarh, Jharkhand, Madhya Pradesh and Maharashtra. The government is also running few pilot projects on DBT in case of food grains subsidy.

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India is expected to spend Rs 2.27 lakh crore on major subsidies in the financial year 2015-16, as per the Union Budget. This is lower by 10 per cent over the previous year’s subsidy numbers, majorly on account of elimination of petrol and diesel subsidies.

The Indian Express takes a look at the entire gamut of subsidies on LPG, food, fertiliser and kerosene to assess if income-based subsidy can be replicated for other items to ensure benefits reach only the targeted ones.

Experts argue that while income-based allocation may not be a very efficient method in case of transferring food subsidy, it can be possibly be tried for kerosene and fertiliser.

The difficulty in implementing the income-based subsidy is the lack of data on taxpayers, especially in the tax-exempt agriculture sector. Another problem is that subsidies in India are linked with the ration card, which is usually in the name of family elder, who may not be a taxpayer.

In all cases, experts say the government should first start with DBT and then move towards an income-based subsidy regime, just as it has been done in the case of LPG.

lpgFood subsidy

Of the total Rs 2.27 lakh crore, an estimated Rs 1.24 lakh crore will be spent on food subsidies alone.

The government first started pilots for DBT in case of food subsidy in some Union Territories including Chandigarh, Puducherry and Dadra and Nagar Haveli. The Chandigarh food department has already started transferring food subsidy to the beneficiary households’ Aadhar-seeded bank accounts. Pilot projects are currently underway in two other Union Territories.

A government appointed committee on restructuring of Food Corporation of India had in January 2015 recommended a gradual introduction of cash transfers in Public Distribution System (PDS), starting with large cities with over one million population.

The committee estimated that DBT for food subsidy could save more than Rs 30,000 crore annually. Experts argue that government should concentrate on direct cash transfer in case of food subsidy, as income-based subsidy may be difficult to implement due to lack of beneficiaries data.

“The income criteria may not be very efficient way to distribute food subsidy. Even the existing PDS system is not working properly and people are not much using the fair price shops,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.

Another reason why income-based subsidy will be tough is because their beneficiaries are by and large identified by the ration card, which is not linked with the tax department database.

“All of these subsidies are ultimately linked to the age-old ration card, which is usually in the family elder’s name, who may not be a tax payer. This makes it difficult to implement income-based subsidies across the board including food subsidy,” said Pronab Sen, chairman, National Statistical Commission.

Fertiliser subsidy

Fertiliser subsidy is a key component for the agriculture sector. The government provides subsidy on urea, diammonium phosphate and potash. During April-September, it provided Rs 62,844 crore of subsidy, with indigenous urea comprising the largest chunk of Rs 34,864 crore. In the FY16 Budget, the government provided for an estimated Rs 72,969 crore for fertiliser subsidy.

The government had planned DBT but it has not seen the light of the day, as the database of beneficiaries has not been prepared.

Industry executives say they are ready with the database to roll out the scheme, but are waiting government directions.

With more than 90 crore people with Aadhar cards, 95 per cent households having Jan Dhan accounts and over 80 per cent phone coverage, DBT to beneficiaries in the fertiliser sector can be quickly rolled out, said US Awasthi, MD and CEO, Indian Farmers Fertliser Cooperative Ltd (IFFCO).

“For fertiliser, we had captured data till last mile for the two districts, so we can implement direct transfer in case of fertilisers. States have tremendous data on fertiliser beneficiaries. The government already has a Fertiliser Monitoring System,” Awasthi said.

He was also hopeful of income-based subsidy in the fertiliser sector. “Income-based subsidy transfer can be attempted for the fertiliser sector, but first they have to start with direct benefit transfer. So we should move one step at a time. We have the capability and it can be rolled out” he said.

SBI’s Ghosh added that income criteria can be used to transfer fertiliser subsidy to only the deserving farmers. “The challenge will be gathering data on farmers’ income but that may be overcome,” Ghosh said.

Another key challenge will be collating tax payers’ data as the agriculture is tax-exempt and the government may not have a ready list of tax payers’ income level.

Kerosene subsidy

The government has announced DBT scheme for distribution of kerosene subsidy. Consumers will have to pay Rs 43 per litre for kerosene from April 1, and the subsidy of Rs 31 per litre will transferred into their Aadhar-linked bank accounts.

Like food, subsidised kerosene is currently provided via the PDS.

With a view to incentivise states/UTs to implement DBT in kerosene, the Centre will give the states cash incentive of 75 per cent of subsidy savings during the first two years, 50 per cent in the third year and 25 per cent in the fourth year, the oil ministry stated while launching the scheme.

As per the data, the government has provided Rs 7,122 crore of kerosene subsidy during April-September in the current financial year. In 2014-15, the government provided Rs 24,804 crore for the same.

National Statistical Commission’s Sen says implementing income-based subsidy in case of kerosene is theoretically possible, but practically difficult. To make it successful, the government would need a robust database on beneficiaries, tax payers and their income levels, he says.

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