Saturday, September 15, 2012

LPG Subsidy Cut - Is there more to it than what meets the eye ?

Manmohan Singh has finally started taking the desperate steps of economic reforms, when news rumours were strife that Congress party itself is opposed it. I say it was Manmohan as the decision was taken at 7 Race Course road, his residence and workplace. Official government release said, limiting subsidized LPG cylinders to six a year will reduce the under recovery to OMCs by 5300crores and a 5 rupees increase in diesel price will reduce the under recovery by Rs. 15000 crore. 
       Even if we keep the argument around its economic sense away for a while, the step of reducing LPG subsidy hasn't stopped intriguing me. Most of the household I know use about a cylinder every month and I also know that 350 Rs a month is a lot to them. This is the amount an average household using a cylinder a month will have to shell out extra in addition to the impact that would come with increase in diesel prices.
       A quick look at the internet tells that there are 14 crores domestic gas consumers. Even a simple calculation tells that 4900 crore (14crore X Rs. 350) would be recovered only if the government had said, every household would have to take one un-subsidized cylinder! But government hasn't stopped a that, it further said, that for the remaining year you would get only 3 cylinders at subsidized rates. So even if you have used only 2 cylinders so far this year, you would still get only 3 and not 4 cylinders at subsidized rate.
       Govt has further noted that total under recovery owing only to LPG subsidy would be 32000 crore for the full year after the subsidy cut. That is, total subsidy without govt. action would have been 37300 crores. On an average it is Rs. 2664 per person for the full year, or the subsidy on 8 domestic cylinders. By simple calculation, 2 cylinders per consumer would be sold at market rates and that shall reduce the under recovery by 9800 crores. 
       But that is only the beginning of the story, as a huge amount of these cylinders are not used for domestic purpose. By a moderate estimate 15% of these are used for commercial purposes. It was an obvious issue, as commercial cylinders are so much more costly owing to the fact that they are sold at a profit. Compared to a domestic cylinder they are sold at a profit(19kg cylinder sold between Rs 1400 to 1500) which is about Rs 700 per cylinder.
Plugging this leak is what I think is the unsaid and probably the biggest benefit of this subsidy cut. So doing a quick arithmetic again, you get a profit of about Rs. 9000 crores taking the total gain(under recovery plus profits) for OMCs to approximately Rs. 19000 crores. This is a full year figure and so the figure for remaining part of the year is Rs. 10000crores.
      The government is obviously downplaying the figure they would recover. The biggest question though with this government is will it do what it is supposed to do - GOVERN? Because even plugging these leaks wouldn't be simple as Indians especially the enterprising units are smart they would find some ways to work around this limit. 
     Lastly, it looks like that our politicians are the people most impacted rather than the common man who has to arrange only Rs. 2000 a year. How would these people arrange for 200 un-subsidized cylinders which is an increase of whopping Rs. 70000 to their annual budget ?

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