Tuesday, February 10, 2015

Subsidised Kerosene

The finance minister plans to scrap the supply of subsidised kerosene through the public distribution system (PDS) and high time, too. To begin with, why has the kerosene subsidy needed reform for decades and yet reform never materialised?
Kerosene obtained through the PDS, being cheaper, is used to adulterate diesel and petrol. Kerosene leakages in the PDS are estimated to be 40 per cent of total allocations. The diversion is lucrative for distributors, who bribe government officials to get licences to distribute the fuel. Kerosene and petrol station dealerships are much in demand as they fetch huge returns through fuel diversion. The government has quotas for awarding such dealerships. In 2004, when corruption was discovered in the awarding of service-station concessions, the Supreme Court cancelled all contracts and ordered the government to distribute them more transparently.
Ending the subsidy would put an end to the adulteration that causes a loss to the government treasury. Second, kerosene blended with petrol and diesel causes engine damage, affecting vehicle life. A third benefit of ending the subsidy would be that air pollution from the inefficient combustion of adulterated fuel would be reduced. Fourth, the substitution of kerosene with solar lamps could help reduce the oil import bill. Fifth, fuel diversion has meant that, sometimes, India’s poor have to go without lights or are unable to cook, because they cannot access their quota of kerosene even though the fuel is abundant at higher prices on the parallel market.
The B.K. Chaturvedi Committee of 2008, using NSS data from 2005, noted that rural households use kerosene primarily for lighting and only 1 per cent use it for cooking, a fact confirmed by Census 2011. With the increase in electrification, the rural use of kerosene for lighting has fallen. The committee recommended that rural households below the poverty line should be given one solar lantern, which would only cost roughly two-thirds of the total annual subsidy on PDS kerosene. This policy was not implemented.
Reform has been tried before. In 2005, global positioning systems were fitted to kerosene distributor trucks, aimed at preventing the diversion of fuel, but the programme was wound up in 2008. In 2006, the government introduced the marking of subsidised kerosene with a dye — once again, the programme closed in 2008. Those who benefit from the corruption proved too powerful to allow reform. In 2007, the petroleum ministry wanted to implement a foolproof smartcard system as an experiment in three states, Bihar, Maharashtra and Uttarakhand. However, all three declined the offer and the plans fell through.
Over the last decade, if PDS kerosene had been distributed in two-litre polypacks, packaged before they reached the refinery gates, the “consumption” of kerosene would have declined sharply. It could not have been diverted as easily as it can be from the current cylinders. Savings from confining the kerosene subsidy to BPL households would release more resources than needed to supply all BPL households with solar lamps (at Rs 1,800 per piece ). The cost of solar lamps for the entire BPL population would be only Rs 7,350 crore. But solar lamps will only be given out slowly. Until then, access to kerosene would need to continue. We can easily estimate the kerosene needs of the BPL population .
As for LPG, we suggest that only BPL households be eligible for kerosene. We estimate, based on NSS 2011-12, that 94.5 per cent of rural BPL households (or nearly 41 million households) use kerosene mostly for lighting. In urban areas, 77 per cent of BPL households (or nearly 8 million households) use kerosene, presumably mostly for cooking, and for lighting only during power outages. In other words, a total of 49 million BPL households use kerosene in India. Presumably, many households above the poverty line continue to use kerosene too, for back-up lighting and cooking needs, but we are assuming that they would not be eligible for the subsidy in any case.
Assuming 10 litres of kerosene is used by each BPL household monthly, and the PDS retail selling price is Rs 14.96 (as in 2014), the annual out-of-pocket expenditure for all BPL households is Rs 8,817 crore. The subsidy cost to the government was Rs 28,215 crore in 2011-12. By confining the kerosene subsidy to BPL households, Rs 19,397 crore could be saved annually by the government.
Thankfully, in 2015, the Centre plans to ask states to provide subsidised kerosene only to unelectrified households. States with near 100 per cent electrification will be incentivised to become kerosene-free. In the remaining states, unelectrified households can choose between a cash subsidy in lieu of kerosene allocation and an upfront subsidy for greener solar lighting systems. For budget 2015-16, cuts in the Centre’s social sector spending allocation is aimed at aligning plan expenditure with subdued revenue collections. Hopefully, kerosene subsidy reform will not be sabotaged this time around.
source: http://indianexpress.com/article/opinion/columns/a-fuels-errand/99/
The writer is professor of economics, Jawaharlal Nehru University,Delhi, and author of ‘Policies to Achieve Inclusive Growth in India’ 

The resilience of briefcase politics

In 2014, India commemorated several important anniversaries — the 125th anniversary of Jawaharlal Nehru’s birth and the 30th anniversary of Indira Gandhi’s assassination and of the horrific anti-Sikh riots that followed, to name just two. But 2014 also marked the anniversary of another milestone in Indian politics, one that was completely forgotten but continues to affect Indian democracy in ways that the nation is still struggling to grapple with.
Forty-five years ago, in 1969, Prime Minister Indira Gandhi convinced Parliament to amend the Companies Act and impose a total ban on corporate giving to political parties. The ban signified a critical juncture in the evolution of India’s electoral regime, eliminating the most important legal source of election funds. Without providing an alternative financing mechanism (such as state funding), Gandhi’s decision — far from abolishing the link between business and politics — effectively pushed campaign finance underground, an affliction that exists to the present day. Today, it’s an open secret that the opaque funding of elections represents the single-biggest driver of political corruption and criminality in India.
To be fair, the ban was enacted amid genuine consternation over political corruption. As early as 1964, the government-appointed Santhanam Committee warned of the corrosive effects of collusion between businessmen and politicians. Indeed, Gandhi herself sought to justify the ban as a monumental effort to curb cronyism.
In reality, however, she was more likely motivated by proximate political concerns. The aim of the ban, as Prem Shankar Jha put it, was not to ensure the Congress a “secure above-board source of funds in the future, but to cut off the flow of funds to its rivals”. Gandhi, alarmed by the swell of corporate support for right-wing opposition parties like the Swatantra Party and the Jana Sangh, as well as the threat the business-friendly Syndicate posed to her leadership within the Congress, yearned to cut them down to size.
However, unlike what transpired in many European democracies during this period, the government did not substitute private sources of party funds with state-funding of elections or party expenses. As a result, the ban created a financial vacuum that was filled by black money, institutionalising a corrupt equilibrium in which politicians allocated licences necessary to operate in an increasingly dirigiste economy in exchange for under-the-table “donations”.
This was part and parcel of a larger attempt to put business in its place and reassert the primacy of the state. In quick succession, Gandhi nationalised India’s banks and its domestic coal industry and imposed sweeping new restrictions on business. In spite of these acts, Gandhi cynically calculated that big business would still donate to the Congress, albeit covertly, fearing its ability to use its political and regulatory power as a cudgel to discipline businesses who refused to play ball.
On this score, Gandhi was on target. The ban ushered in an era of “briefcase politics”, in the words of Stanley Kochanek. Inflation, coupled with intensifying political competition, led to an arms race in election expenditures and the consolidation of a corrupt political finance regime in which ruling parties that controlled the regulatory levers of power maintained an advantage in fund-raising.
Moreover, the ban spurred the rise of individuals and organisations, especially those with criminal backgrounds, who had access to unaccounted money and were thus sought after by parties for their ability to discreetly aggregate and distribute cash. In the initial decades of the republic, the Congress had contracted with all manner of lawbreakers and mercenaries to quietly manage elections. Now, such characters were openly embraced by Congress leaders — and soon, by all other parties — as political candidates in their own right, thanks to their financial resources.
Many years later, in 1985, recognising the folly of the ban, the Congress government of Rajiv Gandhi once again legalised corporate giving, but corporate contributions remained under the table. By this stage, the exchange of political favours for illicit cash had become so deeply entrenched that re-legalisation garnered little support. Companies had little incentive to be transparent as it could prompt retribution from politicians or parties that had not received funds. Parties remained opposed because the prevailing system minimised accountability to funders or party members.
Fast forward to the present day and the Association for Democratic Reforms (ADR) reports that 75 per cent of the income of India’s six major parties comes from undocumented sources. Around half of these funds came in a period of four months around elections, largely in cash (for the Congress, this figure stood around 90 per cent). But party resources are a drop in the bucket because candidates are expected to foot the vast majority of their campaign expenditures. Ironically, while politicians of all stripes complain about unrealistically low campaign spending limits, candidates also routinely report spending just over half what they are legally entitled to (in reality, campaign spending exceeds the prescribed limit by several orders of magnitude).
Furthermore, despite claims that 2014 marked India’s “good governance” election, a record number of MPs with criminal records (34 per cent) now grace the halls of the Lok Sabha. Twenty-one per cent of these lawmakers face serious charges like murder, attempted murder, and kidnapping. The historical and empirical evidence is clear that the electoral success of “muscle” is due, at least in part, to the advantages of money.
Finding an exit from this morass is not easy, but India has options. The Narendra Modi government can begin by introducing rules and transparency to limit discretion in heavily state-regulated domains (such as land, natural resources, real estate, mining, and defence acquisitions). Absent this, no amount of political finance regulation is likely to have much impact. Beyond the economy, Parliament must close large regulatory loopholes that enable dishonest reporting, such as the provision for unlimited and undisclosed third-party spending on candidates. Furthermore, the Election Commission requires new statutory authorities, such as the power to mandate complete transparency for political contributions. Right now, parties need not declare the source of any donation less than Rs 20,000, ceding a party like the BSP the ability to not disclose the identity of a single donor in the past eight years.
Finally, there is the oft-discussed issue of public funding of elections. Until parties adopt strict rules on transparency and intra-party democracy, public subsidies are likely to do more harm than good. This is the grand bargain many European democracies have struck, and is a deal worth exploring.
But unless a farsighted Central government can champion such reforms, the after-effects of the ill-fated 1969 ban on company donations are likely to be felt long after its 45th anniversary.
Sridharan is academic director of the University of Pennsylvania Institute for the Advanced Study of India (UPIASI) in New Delhi. 
Vaishnav is an associate with the Carnegie Endowment for International Peace in Washington, DC.

Source: http://indianexpress.com/article/opinion/columns/the-resilience-of-briefcase-politics/99/

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