Balance the equation – Social Justice way

The Empowered Group of Ministers – God only knows whatever that means – today finalized and approved the “crucial” – to put it in The Hindu’s words – Food Security Bill. The Food Security Bill, as argued here [1, 2] is a very dangerous initiative. EGoM led by Pranab Mukherjee finalized the Food Security Bill and the bill would be placed on floor during monsoon session of the parliament. The Hindu reports:

The Empowered Group of Ministers (EGoM) on Food on Monday cleared the crucial Food Security Bill, which seeks to entitle 75 per cent of the BPL (below poverty line) population and 50 per cent of the urban population to heavily subsidised food grains.

….

The government estimates the additional subsidy burden at Rs. 13,000 crore, taking its total subsidy bill on food to about Rs. 95,000 crore. [Emphasis added]

Subsidy burden on GoI is about to reach 1 lakh crore rupees. The problem now is where does GoI tap this extra money from? It is here that Social Justice method of balancing the equation comes out. What Pranab now requires is at least 13,000 crore rupees. Actually this number would be much higher than this. However, let us stick to 13,000 crore rupees.

As you flip to other news today, you may find this in The Hindu or a similar news piece in other dailies. Yes, the EGoM led by Pranab Mukherjee is also contemplating restricting subsidized LPG per household to 4-6 cylinders per year. The Hindu reports:

Under the proposed scheme of things, every household would get only 4 to 6 LPG cylinders at the subsidised price of Rs.395.35 here and would have to pay, for any requirement beyond that, a market price of about Rs.710 per cylinder. [Emphasis added]

Wait a minute. Do you see anything interesting here? I do. Lets do a simple math. We will approximate the market price of a cylinder to Rs 800/- and subsidized price of a cylinder to Rs 400/- though actual values are different. Now, according to the proposal of the “task force”, subsidized LPG per household per year should be restricted to 4-6 and for any extra usage, market price of cylinder should be charged. Pretty brilliant if you ask me.

We have approximately 20 crore households in India. Each 14.2 Kg cylinder generally is used for 45-60 days. Approximately 8 cylinders per year are required per household. Approximate requirement is 160 crore cylinders per year. According to our assumption, each cylinder today is priced at a subsidy of 50% i.e., Rs 400/-. So GoI bears a total subsidy of Rs 64000 crores on LPG. If we now reduce the number subsidized cylinders per year to 4, the extra revenue from other 4 cylinders would be 20 crore x 4 x 400 = 32,000 crores.

If you put these two proposals together, you may observe that EGoM’s big game plan seems to be to raise 32,000 crores of money required for Food Security Proposals from LPG segment.This number is actually going to be lesser than 32,000 crores. Remember that we took an approximate 50% subsidy for LPG, which is not the case.

If EGoM thinks that people are not so smart, they are making huge mistake. People will automatically move to other solutions for their daily needs. They will reduce their use of LPG to save on that extra money by probably use electrical equipment along with LPG for daily cooking needs. Where GoI is making a mistake is thinking that people like subsidies. People do not like subsidies. They just find that through subsidies they can at least save a little bit. On the other hand, what people seem to be forgetting amidst all the drum-beating of social justice, is that they will probably get a lower market price for something as fundamental as LPG simply because how enterprises fight it out in open markets is cost differentiation. There is no doubt that if LPG market is opened up, the prices will come down just because private enterprises balance their cost and profit in several different ways. The only way to handle the issue of lowering the price of LPG is to open up the market and legalize business of selling LPG cylinders to households. Until, then Pranab Mukherjee will have a lot of work to do.

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