LPG Subsidies- Not Govt’s problem but our Psyche’s

I had this post drafted on my blog. Finally got the time to complete it.

Well I am not taking the regular route here.
Let me take another route. Forget Government.
What are we doing? Read with an open mind.
IOC has been pushing this message to the customers and gently calling forth for Nation building in the people, it says “Give up your LPG subsidy and be part of nation building movement to provide subsidized cooking fuel only to the needy.”
In the idealistic settings, financially well-off consumers will opt out and oil companies will only have to provide subsidized gas to households that cannot afford it at market price. As a result, this will significantly reduce under-recoveries (It is the gap between the local price of fuel and what would have been the price if the fuel were imported, which is somewhere around Rs 450) for oil companies and subsidy outflow for the government.
So if this happens, no need for Govt to take sensitive decision of price hike without the hullabaloo, without opposition creating ruckus in the Parliament in the interest of the common man.
How Awesome! Isn’t it?
IOC is even putting the list of such customers on the Scroll of Honour.
I checked mine, check if yours is on the list?
If not Please go opt out of Subsidy, because I am sure if you’re on Quora, you’re well affluent enough to give up the subsidy? Will you?
Ok! Let us come to harsh realities. Though without a doubt, the idea and the intention are good. The problem is that it doesn’t look like it will produce results.
While I am writing this answer, the Scroll of Honour on Indane gas website had 4380 entries with estimated combined annual savings of about Rs 2,62,80,000.
Good enough?

No!

Let us cross check the numbers.
IOC alone has over 53 million gas consumers and it delivers 1.2 million cylinders per day.
I guess the program was launched in the first week of August not sure of the exact date, then, at the current pace, it will take years to achieve a critical mass of consumers voluntarily opting out to make a significant difference in reducing under-recovery.
For the record as said above, the under-recovery is approximately is 450 per cylinder and the total under-recovery on sale of LPG for 2013-14 was around Rs. 47,000 Cr. With third quarter up already, now the subsidy would be around 28-30 K crore ( read as 28 thousand crore- has 12 zeroes) HUGE, isn’t  it?
So who is going wrong here? We or Government?
 Answer is None.
It is general psyche of the people, according to behavioral economics usually people prefer to go by default option if it saves us some money, no matter how well we are doing? Or how rich we are?
Well some may go on the record here in the comments and will blame India, Indians, Govt. etc. But it is same elsewhere as well, I have seen a French man in the company where I worked- bargain with a vegetable vendor  though he was rich enough to buy the entire cart of vegetables every day. Not to blame the French man, but it is the general Psyche of people.
So, it is unlikely that consumers will take the pain of giving up subsidies when evidence suggests that people don’t make changes to the default option even when they stand to gain even something.
Now that we have defined the problem, and the problem is Psyche!
How can we solve it the oil companies really wanted to make a difference?
  1. Motivate people to change their psyche, to give up subsidies and set up PR experts to do this job. Now I don’t think their salaries will be a problem considering the huge amount if they can make a difference. (Tough task, isn’t it? Yes, very tough)
  2. Instead of asking people to opt out of the subsidy scheme, we can make non-subsidized gas the default option and then asked consumers to opt in if they wanted subsidized cylinders. This way the sensible well-off consumers won’t go to their gas dealers to get their names included in the list of subsidized consumers.
  3. To further discourage well-off users, oil companies can ask consumers to put their signature on a statement that they need government support—no questions asked. So again the Psyche is the same, to go for the default option, and default option is non-subsidized.
  4. Or still better we can do the diesel way. That is the idea of gradually increasing the diesel price was an amazing plan. The monthly price hike of 50 paise /pl will not invite protests ;). The government can do the same with LPG and end the under-recovery in, say, 2 years, 3 years? But going by the pressure ruling govt faced on rail price hike, it is unlikely that the brave the Modi govt is , yet unlikely to take such move in LPG thing. Even if govt does so, Congress, AAP, even we will post pictures, statuses asking “acche din kahan hain?”
In such a situation? What do you suggest Govt to do?
It can well do as the above points or continue giving Subsidies.
Edit: After reading this, a friend of mine suggested this.

I felt giving up subsidy (a perk) is not practically viable because of the psychological & societal temptations. But instead, what government should do is give subsidy to all population equally with limited cylinders and include a fuel subsidy cess in the income tax.

Calculations:

  •        Total income tax collected is ₹7 Lakh Crores in 13-14. <refer figure below>
  • Total LPG subsidy burden on the nation is ₹0.28 Lakh Crores in 13-14.
  •                Introducing a 3% fuel subsidy cess just like education cess will cover the subsidy by ₹0.21 Lakh Crores to start with.

Why income tax?

  •             Psychology, people worry about it only once in a year. but, raise in price of cylinder worries them every day. 🙂
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2 thoughts on “LPG Subsidies- Not Govt’s problem but our Psyche’s

  1. shivani271656 says:

    Nice write up, but in your friend’s solution I think there is a side case. If 2-3 people are working in a family of 4 there will be cess on all of them. Moreover many people like myself live in a pg or take tiffin – no cylinder in my house, why I am paying for it?? Education cess is different we understand the need of small children to get educated but oil cess is something the government must tackle in the form of policies and renewable sources of energy. The IOC initiative is voluntary not compulsory

    Liked by 1 person

    • Saiprasad Bejgam says:

      Indeed the case, good point, it was born out of ways to find how we could recover the subsidy. Good, you introspected it.

      IOC initiative is voluntary, that is how, we are not able to tackle is the problem.

      Like

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