Why does the Indian government provide a subsidy in the gas cylinder?

economy

Answer by Jai Parimi:

Definitely not to provide an alibi for dowry killings.

Why did GOI introduce subsidy in LPG?

  • LPG subsidy was introduced in 1960's and petrol based subsidies were introduced in 1939 – 1945.
  • Later, Government promoted clean energy and reduced the carbon footprint by reducing the usage of wood and charcoal for home needs.
  • Subsidy was initially introduced and eventually wooed Indian families (of all classes) who used to cook food in smoke choked rooms.
  • The benefits were not limited to the environment but, caused increase in hygiene, health and comfort of each and every household in every nook and corner of India.
  • In short, subsidy is justified in the past.

Why is GOI providing subsidy now?

  • As others put it, One reason is vote mongering politicians wooing the middle and below middle classes. They wouldn't dare to hurt the middle class households who embraced LPG as one of the comfortable and affordable alternative. There still is a need of LPG subsidy in below middle class societies who find subsidized cost to be huge.
  • Even in today's world, Subsidies are justified to an extent. But, Problem arises because of the people who sideline these subsidies and misuse them for non-domestic purposes. It is an open secret how the black market of LPG is rampant in India. Please take a look at Study of efficient subsidization options for India for more detailed discussion.

What should Government do?

  • In short, the paper recommends
    • Eventual complete elimination of subsidy in steps.
    • Focus on targeted subsidy to BPL coupled with direct transfer of money.
    • Allowing BPL households to trade their LPG subsidy with cash to convert it into income subsidy.
    • Limiting the subsidy for BPL household and eventually reducing the upper limit slowly.

After reading the paper, I guess previous UPA government did try to implement few of these suggestions. I hope NDA government being pro-development will take the steps forward. 🙂

What do I propose?

This is just a random thought which I penned down. I understand policy and taxes are not that easy in reality. Use caution.

  • After reading Saiprasad's answer, 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. <taken from Saiprasad's answer>
  • Introducing a 3% fuel subsidy cess just like education cess will cover the subsidy by ₹0.21 Lakh Crores to start with.
  • 75% LPG subsidy burden reduced on government with a 3% cess (tax on tax which comes to 0.3% if you are in 10% slab).

Why income tax?

  • Psychology, people worry about it only once in a year. but, raise in price of cylinder worries them every day. 🙂

Thanks Varsha Singh for the A2A.

Why does the Indian government provide a subsidy in the gas cylinder?

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