The paper holds a discussion on the announcement contained in the budget that the central government would actively explore the option of using an appropriate form of the ‘food stamps’ or an alternative scheme to improve the efficacy and reduce the cost of the current system of administration of food subsidies. It also discusses the issues of subsidy on account of Liquefied Petroleum Gas (LPG) and device a system of subsidisation based on ‘LPG Stamps’ or some other scheme to improve the efficacy of subsidisation and remove the large distortions created by the current system. LPG subsidy has grown historically and has become quite high because of aggressive growth in connections and increase in per connection consumption in addition to rising input costs. Given that there is evidence that LPG subsidy has been ineffective in increasing penetration in rural and poorer households, there is a case for capping and targeting LPG subsidy. Otherwise it can explode over time unless new connection growth is curbed, which is indefensible. The best option to curtail LPG subsidy would be to eliminate it straight away. However, there are factors which are likely to make it difficult. The next best option which sharply focuses on the deserving segment is direct subsidy to below poverty line families. These households may be given up to 8 coupons every year. It could be paper coupons with security features or smart cards, using IT for identification and entitlements. Direct subsidy to BPL family through coupon would allow them to pay cash equal to retail price less the subsidy per coupon. The BPL coupon holders may be allowed to trade the coupons as this would convert the LPG subsidy to income subsidy. Coupon based direct subsidies require efficient administrative support associated with coupon distribution, appropriate documentation, coupon accounting, collection and cash reconciliation. Irrespective of any method of LPG subsidy reduction, there is a need to examine the taxes built in currently estimated gross subsidy. The net subsidy to the consumers should be the basis of elimination. Even if the state governments continue to collect sales tax, the central government which also collects taxes and simultaneously bears subsidy should neutralize the subsidy estimate from central taxes. Another issue which warrants closer examination is the impact of volatility of input costs on retail prices. The rationalisation of prices and of tax reform in this sector is long overdue and they need to be simultaneously pursued.
Efficient Subsidisation Of LPG: A Study Of Possible Options In India Today
Author : Sebastian Morris, Ajay Pandey