And the populist policies are back.
With the government realizing that elections can be won by bribing people, the number of subsidized cylinders has been raised to 12, from 9 a year. This is just election targeting because the average consumption of cooking gas in India is about 6.9 cylinders per year per household.
The subsidized price is around Rs. 414 per cylinder, while market prices are way higher at around Rs. 1241 per cylinder.
Secondly the subsidy which was to be paid directly into bank accounts linked through Aadhaar, has been suspended, it seems. This is again ludicrous - a direct transfer is way more transparent and less prone to corruption than to hand out money into oil companies as a subsidy, but the latter is easier to rig to siphon out money. Guess which one’s being chosen now?
The next government that says it will reinstate the 9 cylinder limit and go back to aadhaar based payments will get my vote.
Obviously, we’re going to pay for the subsidy, collectively. That income tax you hate to pay will need to pay.
Rajan Not Happy
RBI Governor Raghuram Rajan isn’t happy about this. The RBI has been screaming from the rooftops, no scratch that, the most they will do is write a report in bold font. They have been writing in bold fonts that these subsidies are distortionary, and that the fiscal problem of funding these subsidies remains a huge burden. Moily says the extra cylinders will cost just Rs. 5,000 cr. per year but it does distort prices by keeping LPG cheaper than it should be (and only the middle-class and rich are able to benefit as the poor can’t get a connection!)
“But beyond a certain point, you are reaching people who can well afford to pay for it. Now whose pocket is it coming from? It’s coming from the pockets of people who are getting subsidised.”
When asked again, Rajan said that they were “going from 87% of the population to 97% of the population. If you are subsidising 97% of the population, you are basically subsidising people who are paying for it themselves”.
I like straight talk, and I must say I’m impressed, even with all my cribs about the RBI.
Impact: 5,000 cr. is probably understated. Of about 10 cr. households getting cylinders, the Rs. 800 subsidy per cylinder itself is Rs. 8,000 cr, for a single extra cylinder. However, given the Indian average is 6.9, many will not use that extra three (I won’t, for instance, as I need a cylinder once every 45 days or so, which is 9 a year).
The fiscal issue is not that this has been done, but that now other departments will demand their own subsidies. Free food, free water, free electricity - and a costly fiscal nightmare for the next government - are probably now fair game. A new government, especially a coalition, will find it politically difficult to remove these freebies, so they’ll stay. In the name of governance, our policymakers are stealing from our future.