By Prashansa Srivastava
The Government of India has taken steps to gradually phase out the subsidy on kerosene. It has asked state oil companies to raise the price of subsidised kerosene by 25 paise per fortnight—until the subsidy is completely eliminated, or, until further orders. The Ministry of Petroleum and Natural Gas has assured that the needy will not be deprived of the kerosene subsidy.
Phasing out kerosene: Attempts so far
The government has been aggressively discouraging the use of kerosene for a long time. A significant penetration of liquefied petroleum gas (LPG) and rapid electrification of villages has reduced the dependency on kerosene. A record expansion of cooking gas in remote and rural areas has provided a cleaner substitute. The urban households have also switched to LPG due to better availability of this cleaner cooking fuel.
As a result, Kerosene consumption fell by 21% in 2016-17. Last year, the government gave free connections to over 2.5 crore people under the ‘Pradhan Mantri Ujjwala Yojna. Delhi and Chandigarh have already become kerosene-free cities.
Fuel subsidy: A liability?
Subsidising fuel and fuel products is a common phenomenon in many developing economies. Fuel subsidies are generally aimed to shield consumers—especially poor households—from high and often volatile fuel costs.
However, fuel subsidies have proved to be both inefficient and inequitable. They tend to promote overconsumption of fuel and impede the adoption of energy-efficient technologies, such as LPG. They also crowd out high-priority public spending on health, education and infrastructure. Moreover, most of the benefits of fuel subsidies have been seen to reach higher income groups, who tend to consume more fuel and use it for dilution of diesel.
Financial benefits of subsidy removal
By reducing subsidies, the government aims to bring the price of the commodity closer to the market prices.
A higher price of the fuel will decrease its consumption. Further, removal of the fuel subsidy will improve the government budget by decreasing the expenditure. This will also help the government in handling increasing fiscal pressures.
The rise in kerosene prices due to the removal of subsidy will also prevent its diversion for the adulteration of diesel. Adulterated diesel is a mass pollutant and also damages the vehicles it is used in. The subsidy has for long contributed to this ongoing practice of adulteration, killing machines as well as humans.
A relief for the environment
Phasing out fuel subsidies has profound environmental and health benefits. Reducing or removing fuel price subsidies lowers greenhouse emissions—improving the air quality and thus, human health. Kerosene is an extremely dangerous indoor pollutant. It exposes households to very high levels of fine particulate matter, leading to health risks of stroke, pneumonia, lung cancer and heart disease.
The phasing out of the subsidy will also level the playing field for renewable energy and promote cleaner fuels. A large discrepancy between fossil fuels and renewable energy prices creates disincentives for renewable energy. Removing the kerosene subsidy would allow for rapid transition from fossil fuel to renewable energy. Funds saved from the removal can be redirected to clean energy subsidies and other environmental programmes designed to mitigate environmental degradation.
Hurdles to a kerosene-free India
Since cleaner fuels tend to be costlier, poor households cannot be expected to make the switch easily. So, the subsidy will exclusively target those who need it.
A key challenge, however, remains in ensuring that the subsidy is accessible to the poor. The biggest hurdle to this is the lack of a streamlined and unified digital consumer database. In such a case, to prevent further corruption and black marketing, a complete phase out would have been a more desirable option.
Subsidies in general—and fuel subsidies in particular—are sensitive to the political economy. Hence, the long term impact of such a reform remains doubtful since subsidies are an important political currency for State governments.
Energy security and access to clean energy are high on India’s priorities. Moving away from subsidised kerosene and envisioning a kerosene-free India is a positive step in this direction. However, the affordability, reliability and universal availability of alternative fuels must be ensured to enable a full phasing out of the kerosene subsidy.
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