How to solve the problem of under recoveries on LPG?

How to solve the problem of under recoveries on LPG?

Under recoveries on oil and gas in India remains one on the biggest drag on the fiscal deficit and it accounts for bleeding balance sheets of oil and gas marketing companies. By official estimates under recovery on a LPG cylinder is around Rs.300. Energy prices remains one of the most contentious issues in the public domain and it is one of the yardsticks people use to measure the performance of the governments. Recent price rise of LPG and Diesel have made the media and opposition parties go on the offensive against the government, even when government is taking a sound economic decision.

 

The problem here is that there LPG is heavily subsidized and the government in subsidizing it is incurring a fiscal hole in its balance sheet. LPG is one of the efficient sources of energy and is better than burning charcoal or wood for house hold cooking. Government started subsidizing LPG when the economy was relatively backward in terms of using efficient sources of energy for household cooking and allied purposes and the use of LPG was encouraged by means of subsidizing it to provide an affordable and clean energy solution. As the economy and incomes grew, government failed to make a reality check and alter the subsidies it was offering on LPG and other energy products and bring it in line with rise in incomes. Any benefit passed on to the general public in terms of price concessions becomes politically sensitive and ‘vote back’ politics prevent even minor tinkering with price rises. The subsidies continue to swell and government coffers continue to bleed.

The solution to under recoveries is not as radical as it is thought to be. Offer one unit of LPG gas (in this case a cylinder) per family or per connection at the current subsidized rate. Increase the price at an incremental rate for increase in usage (such as charging higher prices for 2nd, 3rd cylinders and so on). The fall out for such incremental prices might be an increase in demand for the number of connections and that need to be managed by implementing strict controls and checks. In such a case LPG subsidy will be capped and relatively within bounds.

 

A reform of distribution network of LPG products also needs to compliment incremental pricing mechanism. The leakage of subsidized LPG which is meant for house hold use to commercial and industrial uses undermines the basic purpose of subsidizing the household fuel. For those who feel, the discussed pricing mechanism will increase inflation; please be assured elimination of deadweight loss and reduced subsidies will increase spending on social sector projects and decrease inflation in the medium and long run.