Half-way solutions

THE SUBSTANTIAL INCREASES in the prices of kerosene and liquefied petroleum gas (and separately of aviation turbine fuel) will go some way towards controlling the petroleum subsidy, but they are not going to help the poor and middle-class households balance their monthly budgets. Moreover, a price increase unaccompanied by administrative action and policy measures to promote a rational fuel use policy is not by itself going to address the underlying problems that contribute to this subsidy. The Government also has to first deal with the chorus of protests from both its constituent parties and the Opposition.

The facts that justify the price increases, which were postponed by a month to meet the electoral compulsions of the Andhra Pradesh Chief Minister, Mr. Chandrababu Naidu, are unambiguous in their implications. Global crude oil prices have more than doubled in the past year and show no sign of declining substantially. This has meant that the subsidy on LPG and kerosene which was large even before global prices moved upwards has only become larger over the past year. The Government's statistics are that without a price hike, a Rs. 6,300-crore deficit in the Oil Pool Account would have increased to Rs. 19,000 crores over the next year. A five-year Government policy, formulated in 1997, also calls for a gradual alignment of domestic prices with world prices and a reduction of the subsidy to 15 per cent of world prices. For more than 15 years the Government has been trying without success to eliminate the subsidy on LPG. Even now, after a 25 per cent increase in prices, the Government claims that the subsidy will only be reduced from Rs. 162 to Rs. 132 a cylinder. (The Government, however, needs to be more accurate with its facts. Earlier this month - i.e. before prices were increased - Parliament was informed that the subsidy on LPG was Rs. 121 a cylinder of 14.2 kg.) LPG is at best a cooking fuel for the middle classes, so a subsidy of almost 75 per cent of the true cost is indefensible. However, with subsidised LPG now being provided to the poor in a few States (as in A.P.), the financial burden on both the poor and the State Governments will increase.

The larger cost of the price hikes will be paid by consumers of kerosene, which remains the lighting fuel of the rural poor and the cooking fuel of the urban indigent, who will now have to pay double the earlier price (though even then half the full cost will remain subsidised). With kerosene prices so far at just a tenth of petrol prices and about one-seventh of diesel prices, a considerable amount of adulteration of the transport fuels has been taking place - in spite of the fact that the use of kerosene damages the engine and causes considerable air pollution. The incentive to divert kerosene from the public distribution system for such illegal use will remain even after the price hikes. The State Governments have been singularly incapable of checking such diversion in the past and it remains to be seen if they will act any differently now. The large subsidy on kerosene has also meant that a considerable amount of smuggling takes place from some border States - notably from West Bengal to Bangladesh where kerosene is priced four times higher. Whether from its illegal use in transport or as a result of smuggling, the real losers are the rural and urban poor. They will now have to pay a lot more for whatever little is made available to them through the PDS. Their situation will change only when there is a meaningful attempt at illumination of rural homes and at making the cleaner and more efficient LPG available in large quantities to the poor as well. But the Central Government continues to see the issue solely in terms of how to reduce the subsidy on petroleum products.

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