Budget signals major subsidy reform on fertilizers, kerosene

NEW DELHI - In a major reform move, Finance minister Pranab Mukherjee Monday announced direct cash transfers for the poor by March 2012, instead of the present subsidy method of giving money to retailers to sell subsidised kerosene and fertiliser.

To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilisers, the Government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner, Mukherjee said in his general budget speech Monday.

As per revised estimates for 2010-11, the government spent Rs.54,976 crore (Rs.549 billion) on fertilizer subsidy, and another Rs.38,386 crore (Rs.383 billion) for petroleum subsidy.

In 2010-12, the government expects a sharp decline in its spending on oil subsidy for 38 percent, with an allocation of Rs.23,640 crore (Rs.236 billion) to state oil marketing companies, as direct cash transfers are scheduled to start only in March 2012.

It is a much more modest increase of 9 percent to Rs.49,997 crore (Rs.499 billion) for subsidy in fertilisers.

The finance minister acknowledged that there were significant holes in the public distribution system, which had led to diversion of subsidised fuel from the intended beneficiary.

A significant proportion of subsidised fuel does not reach the targeted beneficiaries and there is large scale diversion of subsidised kerosene oil. A recent tragic event has highlighted this practice, said Mukherjee referring to the death of Malegaon Additional Collector Yeshwant Sonawane last month, who was set alight by members of the kerosene mafia.

He admitted that the government had been considering this measure for a long time. The debate now has to make way for decision, asserted Mukherjee.

Last year, the government had allowed the oil retailers to decide the price of petrol according to the price of the Indian crude basket. But, it continued to exert control over the price levels kerosene, cooking gas and diesel.

As per oil companies, they are suffering losses of Rs.21 per litre on kerosene, Rs.356 per cylinder of cooking gas and Rs.10 per litre of diesel.

On the fertilizer subsidy front, Mukherjee said the new policy on providing subsidies on fertilisers on the basis of their nutrient composition could soon be extended to urea, one of the most widely used fertilisers.

“Nutrient-based fertiliser policy for urea is under consideration,” he said.

The nutrient-based subsidy (NBS) regime is expected to promote balanced fertiliser utilisation and consequently increase agriculture productivity in the country through higher usage of secondary and micro nutrients.

It is also expected that new innovative fertiliser products would be developed subsequently under the NBS regime to meet the different requirements of Indian agriculture while showing the actual demand for fertilisers.

The minister also mentioned that the government had already established a task-force chaired by Nandan Nilekani to work out the modalities for the proposed system of direct transfer of subsidy for kerosene, LPG and fertilisers.

The interim report of the task force is expected by June 2011. The system will be in place by March 2012, he added.

The implementation of the direct cash transfer will be the major test of the Aadhar-UID project, which aims to empower the poor, by increasing transparency in service delivery.

So far, only 20 lakh UID numbers have been distributed. But the project will gather steam towards the second-half of 2011, by its plan to generate 10 lakh numbers per day from Oct 1, 2011.