Scrap subsidies that burn funds

In Gujarat, Narendra Modi has pioneered the Jyotigram project which provides 24×7 domestic electricity to all rural households. He wants to spread this to the whole country, and some states (like Madhya Pradesh) have already implemented the idea.

However, neither Modi nor any chief minister is asking a simple follow-up question. For decades, kerosene has been sold at highly subsidized prices on the grounds that it provides essential rural lighting to villages without electricity. However, if electricity is now available in all villages in some states, and will soon cover the vast majority of the rural population, why should the kerosene subsidy continue, especially when it’s well known that a corrupt, leaky distribution system means that little actually reaches the poor?

Some critics have long advocated replacing the kerosene subsidy by a cash transfer, to prevent widespread diversion of supplies to the non-poor. But even that makes no sense if electricity is available in almost all villages. Typically, rural electricity is free or highly subsidized, so affordability is not an issue.

There remain many unelectrified villages. It is also true that installing a light point in a house involves some expense. So the most uncontroversial way forward, which will place no additional burden on existing deserving beneficiaries, will be to give a free solar lamp to every household currently qualifying for subsidized kerosene.

A cheap solar lamp costs just Rs 700 but we should go for good quality solar lamps that cost Rs 1,800 apiece. Mass government purchases will bring this cost down to Rs 1,500. So, the scheme will cost the government a tiny fraction of the massive Rs 30,000 crore it spends every year on subsidizing kerosene.

Nor is this the whole story. Many studies show that around 40% of all kerosene, supposedly meant for the poor, is diverted to other users, mostly for adulterating diesel.

The kerosene subsidy is a whopping Rs 33 per litre, so adulterators make huge profits by adding it to diesel. In the process, by replacing taxed diesel with subsidized kerosene, they cause the government an additional tax loss, estimated at Rs 3,000 crore.

Worst of all, the kerosene-diesel mix is highly polluting and produces huge quantities of particulate matter that cause respiratory diseases. The impact is the largest on poor people living on the pavements of cities, who are exposed to the maximum pollution, and health problems in turn are a leading cause of poverty. A diesel-kerosene mix is also bad for the engines of the vehicles running on adulterated fuel. The life of such engines can be halved. Thus the kerosene subsidy ends up, unwittingly , ruining the engines of trucks, buses, tractors and other forms of transport.

Why , then, does the subsidy continue unchecked? One reason is that many urban households use kerosene for cooking. Subsidizing such middle class consumers makes little sense from an economic viewpoint, but politicians are happy to spread goodies to a larger proportion of voters.

Recent studies now show that kerosene fumes from cooking are serious health hazards. One study by SolarAid, an NGO working mainly in Africa, suggests that inhaling fumes from kerosene stoves is equivalent to smoking 40 cigarettes per day. That means kerosene causes not just respiratory diseases but cancer too.

It is outrageous for any civilized society to have a subsidy that pollutes, kills, spreads disease and ruins transport vehicles, all the same time. The biggest beneficiaries are adulterators, and the biggest victims are poor people living on roadsides.

Worse, the huge sums spent on subsidizing kerosene make a mockery of government health spending. The direct cost of the kerosene subsidy plus its health costs for the population exceed the entire budgetary health outlay of the central government.

Abolishing any subsidy is politically tricky. Opposition parties will cry themselves hoarse that the government is ruining the lives of the needy. Populist TV anchors will sensationalize the issue to try and grab a larger share of the TV audience. Cool reasoning will take a back seat.

Besides, there are indeed a sizable number of rural folk in non-electric areas for whom kerosene is still an important need for lighting. So, if the kerosene subsidy is abolished, something must be done for the losers. The obvious way forward is to provide one or maybe two free, high quality solar lamps to all households currently eligible for kerosene.

Obviously many existing holders of kerosene cards will have no use for the lamps and sell them for cash. This is what happened when the DMK gave free TV sets to redeem an election pledge. But that will be a small price to abolish a subsidy that kills and impoverishes.