Sunday, March 2, 2008

Middle Class and Gas

Paradoxes, perils and possibilities in LPG subsidies

The other day, when I, along with my wife, was enjoying our group’s latest film Mithya, I received this frantic call from my brother that there is a crisis at home. On questioning, I realised that our only LPG cylinder has been emptied. It being a Sunday an alternate cylinder could not be arranged and the crisis was more than it looked apparent, as even after chasing and pleading, the cylinder distribution carts and autos he realised that there is an outage and an alternate cylinder is available only after a fortnight!

LPG cylinder has always played an important role in middle class family economics. A great majority of the middle class families have still not evolved out of the erstwhile ‘scarce economy’ standpoint and draw on LPG cylinder as the sole fuel system for cooking needs. For that reason, everything around it – be it supplies or be it prices – the middle class has always been very edgy about it. So much so that with escalating international prices for crude oil, no government has had the political courage to raise the prices and bring it close to market clearing prices. Our netas very well know that the price tinkering of any sort would mean committing political suicide. Although, on the face of it, the government seems helpless, the truth is that this mess is entirely created by politicians themselves, by absurdly politicising the entire pricing procedures. This politics has delivered no public good other than making all oil firms bleed and resulting in market distortion(s).

At this point in time when there is an acute shortage of cylinder in Uttar Pradesh, Uttarakhand, Himachal Pradesh, Bihar, J&K, Rajasthan, Haryana and New Delhi, the very same middle class in order to secure their supplies are paying anything between Rs 600 to Rs 700 per cylinder (i.e. at a premium of almost one hundred percent) to the black marketers. What is amazing is the fact that the very same middle class is up in arms when the government plans to do the same, making another classic case whereby how popular government policies have helped to nationalise losses for private profits.

I remember some reports announcing that at present rates, LPG cylinder has an under recovery of nearly Rs 380. Some other reports put this figure at Rs 256.35 per cylinder. Even if one were to consider any figure in between them, an under recovery of this sort is definitely does not augur well for a growing economy like India and more specifically for oil marketing firms. Oil bonds issued by the government to compensate the loss are also not serving the purpose and only increase the indirect subsidies, in turn a loss to the exchequer.

No matter what, the government has to take this step to bring the price level closer to market equilibrium point. And no doubt that there would be a huge hue and cry on this but then to make that transition seamless, a systematic and concurrent intervention(s) has to begin from the government wherein there is greater transparency and smart targeting techniques, eliminating the use of domestic LPG cylinders for commercial and energy needs.


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