The kerosene scandal

The dirty truth is out. The long-standing scheme for subsidising kerosene, typically done in the name of the poor, is a giant boondoggle because well over a third of the beneficiaries are not the intended people at all, and are probably not poor either.

The kerosene subsidy bill is said to be Rs 10,000 crore. Given the reported leakage of about 40 per cent of the total quantity of subsidised kerosene, the size of the scandal is about Rs 4,000 crore""many times Bofors. And it takes place every year, not just when the government places large defence orders.

As is usual in such matters, the scandal is presented in the form of dry facts that are not designed to stir outrage. A study by D K Pant of the National Council of Applied Economic Research, undertaken on behalf of a fortunately curious ministry of petroleum, used data and information collected from state civil supplies departments, oil companies, kerosene wholesalers and retails, and households. It used a sample survey of 42,000 households across 23 states and union territories, with two-thirds of the households being rural.

On the basis of this survey, the study has estimated three different kinds of diversion or leakage. One is the siphoning off of kerosene meant for the subsidised public distribution system (or PDS), for non-household use (read adulteration of diesel). The second is diversion from the PDS to the market.

And the third is the purchase of PDS kerosene by households without a ration card or an entitlement card""which means the kerosene trader makes a killing. Taken together, Dr Pant has found the leakage of PDS kerosene to be nearly 40 per cent of the total sale of PDS kerosene in 2004.

In some states in the northern and eastern regions, the leakage is more than 50 per cent. And roughly half the families below the poverty line are unable to buy their kerosene entitlement in one instalment""which ties in with the finding on the extent of leakage.

Releasing these devastating findings, the petroleum minister has promised action. If that comes in the form of more administrative measures, they will almost certainly fail, as other such measures have in the past (special colouration of PDS kerosene, for instance, has clearly not prevented leakage).

The minister is unlikely to consider pricing reform because he is not a great votary of the market, and in any case the Left would almost certainly declare war. That means the problem will persist, and kerosene will continue to be used to adulterate diesel in massive quantities.

Since so many politicians own petrol/diesel filling stations, don't expect pressure from the political class to put an end to this scandal in the name of the poor.

Given the proliferating schemes and programmes for the poor, and the multifarious forms in which subsidies in their name are handed out, the case becomes ever more compelling for replacing all market-distorting subsidies and schemes with a simple monetary hand-out to those identified as the poor.

This will save on huge administrative costs, and can be monitored easily because there is only one list to check--and every village panchayat can put out the list in its area. Such simple income support for poor households will be self-financing if all subsidies in the name of the poor are simultaneously eliminated.

Thus, we will stop seeing the under-pricing of domestic power supply in the name of the poor (because the poor don't have electricity connections in such homes as they have).

That will save the electricity boards many thousands of crores, on top of the Rs 4,000 crore that will be saved by way of a kerosene subsidy.