9800 - Is the Indian Government Saving as Much as It Says on Gas Subsidies? - Wall Street Journal - India Real Time

ByRAYMOND ZHONG

Mar 21, 2016 10:16 am IST

A liquefied petroleum gas vendor in New Delhi.AGENCE FRANCE-PRESSE/GETTY IMAGES

India is trying to streamline the way it delivers billions of dollars of cheap food, fuel and fertilizer to the poor. It may, however, have overstated its progress so far—by a factor of 100.

That’s the conclusion of researchers at the International Institute for Sustainable Development, or IISD, a Canada-based think tank. Their focus is India’s new system of “direct benefit transfers” for supplying cooking gas.

Previously, the government compensated distributors of liquefied petroleum gas for selling to households at below-market prices. But since late 2014, it has paid subsidies directly into households’ bank accounts based on the number of gas cylinders they purchase, at full price, from dealers.

Because the new system makes it harder for people to use fake identities to claim more gas than they’re entitled to, India’s government says it saved 147 billion rupees ($2.2 billion) on gas subsidies in the fiscal year that ended March 31, 2015.

The IISD puts the savings at $21 million at most, and writes that the “misrepresentation” is “extremely damaging” to the design of future reforms.

K.M. Mahesh, a deputy secretary in India’s Ministry of Petroleum and Natural Gas, said the government stands by its estimates. “Certainly the government saved that much money,” he said, thanks to the “better-targeted approach to giving subsidy.”

The World Bank and Center for Global Development have embraced the calculations underpinning the petroleum ministry’s estimate to conclude that the program can save India $1 billion a year. Other Indian officials have cited figures closer to the ministry’s: Arvind Subramanian, India’s chief economic adviser, and economist Siddharth George put the savings at $2 billion; Prime Minister Narendra Modi touted them as $2.3 billion.

India has high ambitions for direct benefit transfers. Grain and kerosene subsidies may someday be paid this way as well, to help save on the 1.5% of economic output—one of every nine rupees in the latest budget—currently spent on subsidies.

The retooled cooking-gas benefit is often referred to as a type of “conditional cash transfer” that development economists have studied intensely. But the IISD has argued the new system shouldn’t be conflated with initiatives like Brazil’s Bolsa Família, which the World Bank last year deemed the planet’s largest conditional cash-transfer program.

(India’s new gas program has, however, been recognized by Guinness World Records as the world’s largest “cash benefit program,” ahead of the U.S. earned income tax credit.)

Direct benefit transfer “is not necessarily a bad thing, and it potentially could be a good thing,” said Kieran Clarke, a Geneva-based IISD researcher. “But don’t sell it based on savings that don’t exist.”

MORE IN AADHAAR

The results on gas subsidies also bear on how India moves ahead with Aadhaar, the six-year-old system of biometric authentication that now covers nearly a billion people. It is harder for bank and gas accounts that are connected to their holder’s Aadhaar number to be used by scammers to claim bogus subsidies, or to be denied subsidies because the account-holder’s identity can’t be verified.

But the technology has stirred privacy concerns and been criticized as a costly solution for just one of the many forms of corruption and mismanagement that afflict India’s welfare system.

The petroleum ministry put forth its estimate of the savings last October, in a news release responding to an earlier IISD report.

The ministry said the new program and “related initiatives” had purged 33.4 million duplicate, fake or inactive gas accounts by April 1, 2015. With each account eligible to purchase 12 gas cylinders a year, and assuming the average subsidy is 366 rupees per cylinder, the subsidies not paid out to these accounts for the 2015 fiscal year amount to 147 billion rupees ($2.2 billion), the ministry said.

The IISD’s calculation, meanwhile, goes like this. The new subsidy system was first introduced in mid-November 2014 in 54 pilot districts. But households were given three months to sign up. So fraudulent gas purchases weren’t being restricted until mid-February 2015—almost the end of the financial year.

Mr. Subramanian, the government’s chief economic adviser, has estimated that direct benefit transfer reduces subsidized gas purchases by 25%. So assuming each of the 23.3 million registered households in the pilot districts was buying the maximum permitted 12 cylinders a year, you can estimate how much subsidy spending was avoided in February and March 2015.

The total: 1.4 billion rupees ($21 million). The IISD reckons the costs of putting the new system in place likely wiped out these savings and then some.

One reason for the difference between this estimate and the government’s is they rely on different assumptions about the subsidy paid per gas cylinder. Ministry data show the subsidy was 161.81 rupees in February 2015 and 166.26 rupees in March. Oil prices fell over the course of that fiscal year, so gas subsidies were lower then than in earlier months.

Mr. Mahesh, the petroleum-ministry secretary, said the 366 rupee figure in the government’s news release was the average subsidy paid, over the entirety of the 2014-15 fiscal year, only on gas purchased in New Delhi. The capital is a common ministry reference point, Mr. Mahesh said.

The IISD’s Mr. Clarke also disputes the government’s claim that the direct benefit program disabled 33.4 million illegitimate connections.

Well before the system was revamped, he observes, gas companies had already been blocking inactive accounts and those registered multiple times to the same name or address. The petroleum ministry said in March 2015 that 12.7 million irregular connections had been blocked this way.

The ministry’s figure of 33.4 million blocked gas accounts isn’t based on the results from “one particular initiative,” said the ministry’s Mr. Mahesh. Rather, he said, it reflects “the entire mechanism we are putting in place.”

Mr. Clarke said not enough data are available yet to precisely estimate savings in the current financial year, which closes this month. The government also hasn’t put out estimates.

What about Aadhaar? The IISD estimates the technology directly helped save an additional $1.8 million to $2.1 million in the 2014-15 fiscal year. That’s based on official findings that duplicate gas connections identified via Aadhaar made up less than 1% of those assessed, and that 35 million gas accounts became newly linked to Aadhaar before the end of that financial year.

Hence, the subsidies saved by denying gas to 350,000 duplicate connections totaled around $2 million. The current fiscal year’s savings, estimated the same way, are $18 million. The figure is higher because the new program wasn’t in effect for the entirety of the previous year.

Mr. Clarke said the deeper problem with India’s gas subsidies is they disproportionately benefit the urban middle class. In the countryside, delivery infrastructure is poor, and even subsidized gas can’t compete with cheaper fuels like firewood and cow dung.

The government is trying to prevent the well-off from buying subsidized gas. It has also budgeted $300 million this year to connect more of the poorest.

These are issues direct benefit transfers alone can’t resolve, Mr. Clarke said. “Why get so caught up with DBT instead of making the subsidy system work for the poor?”

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