Big Picture, GS-3, Indian Economy, Uncategorized

Widening the net Beyond the Income Norm

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In an effort to reduce unnecessary subsidy burden on the exchequer, the Union Government has undertaken a series of LPG Subsidy reforms over the last one year.

Various developments so far:

  1. Launch of PAHAL:

The centre welcomed 2015 with the nationwide launch of the modified Direct Benefit Transfer for LPG (DBTL) scheme (also known as PAHAL), which allowed domestic LPG cylinders to be sold at market price. The scheme aims to reduce diversion and eliminate duplicate or bogus LPG connections.

  • The scheme was launched with the objective to prevent diversion of subsidised LPG, by transferring the subsidy amount directly in the bank accounts of the consumers.
  • It is also important to note here that, with more than 14.74 crore LPG consumers enrolled under the scheme, this scheme has been recognised by Guinness Book of World Records as the largest cash transfer programme in the world.
  • The scheme has significantly reduced subsidy leakage towards non-domestic uses.
  1. ‘Give It Up’ scheme:

Following the launch of DBTL, the government launched the ‘Give It Up’ scheme in March 2015. The scheme was aimed at urging well-to-do households, who can easily afford LPG at market price, to give up LPG subsidy, in order to extend the subsidy benefits to poorer households, without increasing the fiscal burden.

  • As a result of an intensive awareness campaign, nearly 57 lakh beneficiaries have voluntarily given up their LPG subsidy. This translates to an annual subsidy saving of Rs. 940 crore for the government, at prevailing prices and consumption trends.
  • Even though this is a significant achievement, it represents a mere 3.6% of the active consumer base.
  1. Exclusion of high-income households:

Very recently, the Ministry of Petroleum and Natural Gas announced the exclusion of high-income households from the LPG subsidy cover. As per this decision, henceforth, subsidy would not be available for domestic LPG consumers, if the consumer or his/her spouse had taxable income of more than Rs. 10 lakh for the previous financial year.

Why this is a good decision?

According to a study conducted by the Council on Energy, Environment and Water (CEEW) in 2014, the richest 15% of Indian households can easily be weaned of the subsidy, as the full market price (then Rs. 950 per cylinder) is well within their affordability limits. At present, these households account for 25% of the active consumer base.

  • The study also highlights that the richest 10% households in India corner 22% of LPG subsidy, while the bottom 50% households together receive only 30% of LPG subsidy. Thus, the government’s move to target beneficiaries by excluding well-to-do households from the subsidy net is well-founded and timely.

Issues associated with this decision:

  1. Self-declaration:

The government has planned to use taxable income (greater than Rs. 10 lakh per annum) as the basis for exclusion and self-declaration of income as the means for identification. While this is a step in the right direction, the modalities of such an exclusion approach need further consideration.

  • Even though the LPG subsidy is given on a household basis, the announcement suggests that the income threshold is applicable to individual incomes and not that of the entire household.
  • Additionally, though self-declaration is a useful form of policy ‘nudge’, the success relies entirely on the integrity of the respondent.
  • How can this issue be addressed? To overcome this challenge, the government should consider enforcing the scheme by linking LPG consumer data with the PAN number.
  1. Tax evasion and under-reporting:

It is equally important to note here that less than 3% of India’s population pays income tax and a significant proportion under-reports taxable income. Thus, exclusion based on reported income alone would not be as expansive a criterion as is needed indirectly benefiting the tax evaders.

Then how can we fix this?

Experts suggest that it would be more practical and efficient to exclude households based on multiple criteria, simultaneously. The following criteria can be considered for exclusion-

  1. Asset-ownership: One such criterion could be asset-ownership of high-end consumer durables. This could be an important way to capture the material status (wealth) of households than only relying on reported income, particularly in a country where the informal economy is as big as or larger than the formal economy.
  2. Four-wheeler ownership: Less than 5% of Indian households own passenger four-wheelers, and ownership of this high-end asset is heavily concentrated amongst the richest households. This makes ‘car ownership’ an effective criterion for identifying well-to-do households. Moreover, identification based on car ownership could be achieved by using the national vehicle registration database maintained by Ministry of Road Transport and Highways. However, this database would need streamlining to enable a direct mapping with the LPG consumer database.
  3. Other ownerships: Simultaneous ownership of a refrigerator and an air conditioner, or ownership of multiple air conditioners, could serve as another criterion to identify well-to-do households. Information about the ownership of such assets could be obtained either through self-declaration or by using the Socio Economic and Caste Census (SECC) database. Concerns about the authenticity of this database persist, as this is also self-declared.

However, each criterion has its limitation when applied standalone. But, a combination of criteria such as taxable income and ownership of high-end assets, along with a robust database and stringent enforcement mechanism, would help identify and exclude well-to-do households from LPG subsidy effectively.

Conclusion:

The decision to limit the LPG subsidy by income groups is an attempt to address the mis-targeting problem. By doing this, the government is trying to ensure that the subsidy is only going to go to those who need it. The more the government saves, the more it can spend on expanding the reach of LPG connections among those who currently do not have one. The hope is that rather than using the resultant saving simply to shore up the budget deficit, the Centre will use it to ensure that LPG connections are provided for those who still depend on firewood and kerosene stoves.

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