Two days ago, I wrote how the finance minister could use Aadhaar to consolidate his fiscal arithmetic. Today, I shall prove how he can “re-energise” the country by another gentle and calibrated – and not “violent” as it is often mistakenly perceived to be – reform.
The opportune moment to free up fuel prices is now – but “now” does not mean “this instant”; it means in politically palatable instalments over a short period of time. While governments usually postpone tough calls, hoping for better times, experience shows that it is wise to face disappointments squarely.
Mercifully, there is no subsidy on petrol at the moment – and the relative ease with which this major reform has been absorbed should encourage us to follow through with more. On diesel, the ‘under-recovery’ is Rs 3.40 a litre – although, if the more rational export parity price is used to calculate this under recovery, it is only one rupee! India is a substantial exporter of diesel. It has been so since 2000. In the last financial year, India exported diesel worth $25.4 billion or eight percent of total exports. So it is perfectly sensible to switch to export parity price – in which case, the finance minister could move to market pricing of diesel in two quick hops of 50 paise each, about a fortnight apart.
Ideally, there should not be a big difference between the prices of diesel and petrol. People must choose fuel for economic considerations. If the gap is narrow, those who are highly mobile will likely opt for cars running on diesel, which gives more mileage. If the gap is wide, car companies will pocket the gains by making diesel cars costlier. By continuing the diesel subsidy, we are abetting a perverse situation, where diesel car manufacturers are profiting at the expense of common people.
Now to kerosene, the much misunderstood “poor man’s fuel”. Here, the ‘under-recovery’ in Delhi on a selling price of Rs 14.96 a litre was nearly Rs 33 in June. According to Mukesh Anand of the National Institute of Public Finance and Policy, the share of kerosene in petro-product consumption has declined from 13 percent to nine percent, despite being subsidised. It is sold through ration shops at discounted rates, so the poor can afford it for lighting – which it does not do nicely, giving off a lot of soot, which pollutes indoor air, and harms health. As both kerosene and diesel are middle distillates, they mix easily. The price difference makes it an ideal choice for adulteration. Bhamy V Shenoy of NCAER, a Delhi-based research outfit, had estimated in 2005 that 38 percent of kerosene was used for adulteration. If this estimate holds, there is little justification for such a huge payout.
I would urge the finance minister to announce in the budget a “pilot kerosene subsidy rationalisation plan”, whereby kerosene prices are increased by 10 paise every week. If this were to create a severe disruption (highly unlikely), the pilot could be withdrawn – on the other hand, if it were successful, we would have shaved off nearly a sixth of the subsidy in one year, giving us the confidence to persist until it is rationalised completely, perhaps over 4 years or so.
The government claims that all but 22,000 villages out of 5,96,000 were un-electrified as of end of May. If electrification means not just wires passing overhead but homes being able to access electricity, the government must vow to provide all of them with round the clock power by 2016, like Gujarat. For the very poor, it can give subsidised connections. Since electricity is a state subject, the government should declare that all BJP-ruled states will achieve this goal in the next two years, so that other states are pressured to follow. That will allow the subsidy on kerosene to be scrapped.
Now to the urban scourge of subsidy on cooking gas–the best way to tackle this is for homes in cities to be connected to the gas grid. The monopoly of suppliers like Indrapastha Gas in Delhi should end. We need more competition. The cylinders released should be diverted to towns and villages. Every household should be entitled to say six or nine subsidised cylinders a year. The subsidy in June was Rs 22.58 a cylinder. The ‘under-recovery’ per cylinder was Rs 432.71. Being an urban phenomenon, this subsidy is best given though cash transfers. As identifying the poor is difficult, we could start by dis-entitling the relatively well-off like those owning apartments, paying income tax or owning cars.
Finally, we need to get a fix on coal supplies. The monopoly of Coal India must end. Let it remain a state-owned entity. Prime Minister Narendra Modi believes in running public sector undertakings professionally. CIL will be a test of his resolve. He must allow competition in coal mining and cut the environmental red tape. The threat of ecological damage, according to experts like Prof Kirit Parikh, is exaggerated. Coal mining, according, to him will affect at most about one percent of India’s forested area. Many of the forests atop coal bearing zones are said to be only on paper. Very few are dense, virgin and bio-diverse forests (since this is a fact that can be easily checked, all conjecture and speculative propaganda around it should be squelched). Forests that are cut in the other mining areas can be replanted as the open mines, once exhausted, are covered up. Funds collected for compensatory afforestation can be used. We should invite international mine developers so they not only bring in technology but also best practices. The tribals who are displaced must be given a share in the profits via a simply royalty on revenues, rather than conjure up a convoluted and fudge-able formula.
Finally, the country needs to be convinced about the tangible benefits of rationalizing energy subsidies. While prices will tick up in some items, there will be a massive lessening of fiscal pressures, lowering the cripplingly high level of generalized inflation. Very soon, the benefits shall be apparent to everybody.
Until then, Prime Minister Modi must use his legendary communication skills to keep his people tethered to hope and optimism.