More Hype than Substance

The ways in which prices of subsidised petroleum products, kerosene and cooking gas or liquefied petroleum gas (LPG), have been allowed to gradually creep up will not benefit the poor of India. In the name of “rationalisation” of subsidies, what has been done is that market forces are being allowed to increasingly determine the prices of kerosene and LPG belying the Narendra Modi government’s claims that its policies are aimed at assisting “intended beneficiaries,” namely, the economically worse-off sections of the population. India imports roughly 80% of the country’s total requirements of crude oil. International oil prices collapsed between June 2014 and January 2015 and have since remained rather benign. The market-friendly policies that have been put in place have, hence, not had any significant impact on inflation despite the government appropriating much of the benefits accruing from low crude prices passing only a small portion of the gains to consumers. But these gains are fortuitous.

On 1 July, the Ministry of Petroleum and Natural Gas quietly allowed public sector oil marketing companies to increase the price of kerosene distributed through the public distribution system (PDS) maintained by state governments by 25 paise a litre each month till April 2017. Kerosene accounts for over 40% of all sub­sidies on petroleum products. This decision to increase kerosene prices after a gap of five years will reduce the government’s subsidy on each litre of kerosene in phases from ₹12; the additional subsidy of a bit over ₹1 per litre was borne by public sector upstream companies. Why was this decision not publicly announced? Reason: kerosene is seen as the “poor person’s fuel” and any move to hike prices will not increase the popularity of the government. Kerosene is meant to be used for cooking and lighting. But a huge proportion (over 40%, according to one semi-official estimate) of the fuel is illegally diverted to adulterate diesel and petrol.