Subsidy And Corruption

Deccan Herald 

Saturday, December31, 2005

Petroleum sector

Subsidy and corruption                 

By Bhamy V Shenoy

Reducing the gap in the pricing of petroleum products will make blending less profitable and decrease corruption.

The recent murder of Indian Oil Company’s officer Manjunath made headlines. Manjunath paid the price for trying to enforce the company policy to the letter: a policy of subsidy and product price differentials that is so flawed that it leaves much scope for corruption. What is not realised is that the amount involved is beyond one’s belief. My attempt here is to quantify the revenue loss to the government, as a result of irrational pricing of petroleum products and misused subsidies.

In my estimate, tax revenue loss, subsidies cornered by pump owners, PDS shop owners, rickshaw owners and LPG dealers, add up to Rs 42,000 crore. This is several times the loan and aid India receives from the World Bank, ADB etc. Manjunath was no more than a flea-bite to a network of graft, with an extensive reach that includes bureaucrats and politicians. Manjunath was an aberration in a corruption-ridden system. There are those who believe bribery is the order of things, and a cowardly majority of those who turn the other way.

How did I arrive, you may ask, at this mind-boggling figure? Let us begin with LPG. Domestic consumers enjoy a subsidy of about Rs 150 per cylinder. The market for LPG in the commercial and automobile sectors is rapidly growing, because of its adaptability as fuel. In these markets, LPG is able to command considerably higher prices. As a result, at least 30 per cent of LPG, designated for the domestic market, is diverted to commercial and automobile markets, with the government losing about Rs 10,000 crore per year.

Despite selling LPG in different sizes of cylinders, and greater monitoring by officials, the government has not been able to check diversion of domestic (subsidised) LPG to more lucrative markets. This is because a commodity in short supply finds its way to the market where it commands the highest price. The fault is in the policy of consumer differentiation in the matter of pricing. Far from looking into this, the government is looking at a proposal to create yet another category of consumers entitled to subsidised LPG.

Take the case of petrol. For a market where there are more than 42 million two-wheelers, 2.5 million three wheelers and 8 million cars, the official consumption figure is 7.6 million tons of petrol, which is a gross under-estimation. The actual consumption is much higher, and a conservative estimate puts the figure at 13.4 million tons. At least 5 per cent of reported naphtha consumption, 10 per cent of reported diesel consumption and 10 per cent of PDS kerosene may be diverted to adulterate petrol. The resultant revenue loss would be around Rs 15,000 crore per year.

Naphtha is precursor to petrol in that by processing it, petrol is produced. Although diesel and kerosene are heavier than petrol, while mixing to the extent of 10 per cent, they may not be easy to detect. To detect quality impairment we need costly instruments. Adulteration of petrol with these three components (there are others also), reduces product quality, but fetch enormous profit for petrol dealers who indulge in blending.

Adulteration of petrol is paying because of the wide price differences in respect of naphtha, diesel and PDS kerosene. PDS kerosene is sold at Rs 9 per litre and petrol, at Rs 50. Dealers get a margin of 64 paise a litre. It is, thus, not easy to resist temptation to adulterate petrol with diesel. An auto-rickshaw operator can double his daily earnings by blending kerosene with 3 litres of petrol. Blending petrol with diesel is less profitable, for the price difference between them is Rs 15, as against Rs 41 between petrol and kerosene. Though international price of diesel is higher than petrol, in India diesel is cheaper than petrol. This is because of higher tax rate on petrol.

Some diesel is diverted for blending with petrol. Kerosene is used to blend diesel. It is possible that even some naphtha may be finding its way to adulteration with diesel, for naphtha costs, after taxation, less than diesel. The blending of highly subsidised kerosene with diesel results in an estimated annual revenue loss of Rs 3,000 crore for the government. The kerosene subsidy is Rs 12 per litre or Rs 14,000 per ton. Petrol bunk owners who adulterate save on petrol tax, and also gain from subsidised kerosene. PDS kerosene shop owners benefit from diverting stock to petrol bunks. Such misuse of subsidy could add up to the government revenue loss of Rs 14,000 crore per year.

The Rangarajan committee will not find it easy to streamline this apparently irrational pricing of petroleum products. However, by publicising what the government stands to lose in terms of revenue, it should be able to persuade the authorities to reduce the price differences among petroleum products. The resultant increase in tax recovery from sales should enable the government to devise meaningful ways to help those below the poverty line. Price difference can be lowered by decreasing tax on petrol and increasing the levy on diesel and kerosene. The government tax revenue would remain the same, if not increase; and adulteration would not be that profitable.

By issuing stamps for kerosene supply, the poor can continue to be supplied at a lower price. Such a scheme was successfully implemented in some districts of Karnataka a few years back. With judicious rationalisation of taxes the government may be able to increase revenue as a result of reduced adulteration. What is needed is a strong political will.