Thursday, February 10, 2011

The politics of subsidies.

The socialistic orientation of the government of India has resulted in a plethora of subsidies ranging from food grains to kerosene to water. The rationale behind providing subsidies was to make the poor avail basic amenities at an affordable price. However, most of the subsidies have failed to achieve this goal. government provides a number of subsidies and it would be hard to look into the efficacy of all of them so I would be looking only at a few of them including the much talked about petroleum subsidies and a lesser known urban water subsidy.

Due to the subsidies provided by the government on petro goods, huge losses were incurred by Oil Marketing Companies (OMCs) forcing the government to issue oil bonds to them. This resulted in huge fiscal deficit and also passionate public debate. As a result, the government stopped issuing oil bonds to OMCs. And now after the Additional Collector of Manmad, Yashwant Sonawane was burnt alive by kerosene mafia this issue has again caught the imagination of people.

Considered as “poor man’s fuel”, kerosene is heavily subsidized in our country. A litre costs Rs. 12.70 and the remaining cost of Rs. 20 is borne by the government and the OMCs. However, the fuel rarely makes it to the poor of the country. Instead, a lot of it is either misused to adulterate diesel and petrol or is smuggled to the neighbouring countries where it is priced much higher. According to Assocham, an estimated 38% of kerosene is illegally diverted away from the PDS. This massive leakage of kerosene from our system cannot happen without the collusion of government officials. Oil mafia has become big in our country and every concerned authority has its hands soaked in it. That the benefits of the subsidies do not reach the target population is no secret. In fact the poor end up paying a much higher price as most of the fair price shops collude with the mafia. Yet the government is unwilling to withdraw subsidy from kerosene sighting ‘political compulsions’ thus draining the exchequer.

Now it is not hard to see what these ‘political compulsions’ exactly are. Even after the Manmad tragedy the government has not taken any concrete steps to clamp down the oil mafia. Except for Maharashtra, nowhere else is the administration confiscating illegally stored kerosene. Why? Obviously, due to certain ‘political compulsions.’ Millions of liters of kerosene is pilfered here and crores of rupees are made and everyone gets to smell the heady odour of kerosene money.

PDS kerosene is blue coloured in order to make the identification easy and is called as blue kerosene in common parlance. However, after the death of Yashwant Sonawane and Manju Nath earlier I would rather call it ‘red kerosene’, coloured red by the blood of these two and many others.

Similarly, LPG too is hugely subsidized. In Delhi we pay Rs.345 for a cylinder when the cylinder actually costs Rs. 695. So the government ends up paying the remaining Rs. 350. Numerous studies have proved that the poor hardly use LPG. Most of those using it can afford to pay a higher cost. Again, like kerosene subsidy, the urban poor using LPG mostly buy it from the black market at a higher cost as they do not have a gas connection. Also, subsidized LPG gets diverted to commercial and transport sector thus resulting in mis-targeting of government funds.

To understand the level of subsidy provided by the Indian government let us have a look at the price of an LPG cylinder and kerosene in our poorer neighbours. In Pakistan an LPG cylinder costs Rs. 615, in Nepal Rs. 776, in Sri Lanka Rs. 757 and in Bangladesh Rs. 507. Similarly, a litre of kerosene costs Rs. 37.48 in Pakistan, Nepal Rs. 40.64, Bangladesh Rs. 28, and in Sri Lanka Rs. 22.77. Clearly the Indian government has heavily subsidized these petro goods as compared to its neighbours. This explains why a lot of kerosene is smuggled to these countries. So our subsidies extend to our neighbours too. Following the maxim of “love thy neighbour” to the hilt, aren’t we?

Besides subsidizing petro goods, the government also subsidizes urban drinking water. According to an estimate, the government spends more than 0.5% of GDP in subsidizing water. This was meant to provide clean water at affordable rates to urban dwellers, primarily the poor. But as expected, the beneficiaries are the rich and the middle class. The poor slum dwellers have no access to clean drinking water. In fact they end up paying much higher costs for clean drinking water than the urban rich. 70-80% of the money spent on subsidizing water does not reach the poor.

As with most of the government schemes in India, the subsidy regime too exemplifies right intention but wrong implementation. The motive behind it cannot be questioned; however it has been distorted to serve selfish interests. Subsidies are provided in the developed countries as well but they reach the target population and thus serve their purpose well. In India subsidies have failed. PDS is fraught with corruption and pilferage and only help the corrupt become richer. The government lacks the will to correct the wrongdoings as it is funded by the embezzlers. The media has to make greater efforts and let the common people know the ugly truth behind the subsidy regime. There are other ways through which the poor can be helped, for instance through food/fuel stamps. These are not foolproof but lower the incidence of embezzlement and diversion. The subsidization of petro goods, especially kerosene, needs to end. In the name of the poor, the rich are minting money. The death of Mr. Sonawane has raised this issue once again and this time let the fire not be doused without having its due effect.


  1. So much for problems, so little for solutions :-(

  2. This one was meant to highlight the problems. Will come up with solutions for the flawed PDS in some other article.

  3. Would be looking forward to that!