Ghost savings: Government's estimated savings under DBTL fall short by just 98.87%!
The government’s most recent and much-publicised estimate shows savings of Rs12,700 crore due to reduced LPG subsidy. However, analysis done by IISD, using publicly available data, reveals maximum potential savings of Rs143.4 crore or just above 1% for FY2015
From 1 April 2015, the Central Government is distributing subsidy for liquefied petroleum gas scheme through direct benefit transfer (DBTL or PAHAL). Importantly, DBTL does not remove the LPG subsidy, but simply changes the mechanism by which it is delivered. There is a series of statements and media briefings by government and oil company representatives about humongous savings through the DBTL scheme. The recent one from the Chief Economic Advisor claims an estimated savings of Rs12,700 crore from the scheme. However, an analysis done by International Institute for Sustainable Development (IISD)
shows that the Government's well-publicised fiscal savings figures are likely to be large overestimates and fall short by almost 99% or Rs12,557 crore.
"These savings and expenditure estimates, based on publicly available data, suggest that the government’s figures for net fiscal savings resulting from DBTL are likely to be incorrect—even without accounting for the various administrative costs of program implementation – and may even have been negative," IISD said in a policy note.
DBTL or PAHAL is the largest unconditional cash transfer program in history. Under the DBTL, which has replaced the direct sale of cooking gas cylinders at subsidized prices, households place an order for LPG with their gas distributor, and pay the full, unsubsidized price for the refill in cash on collection or delivery. They then receive an amount equivalent to the current subsidy amount (difference between the actual price paid and the actual subsidy amount for a single refill) via electronic transfer to their bank account. In short, DBTL does not remove the LPG subsidy, but simply changes the mechanism by which it is delivered. Earlier, the customer used to pay only the amount (subsidized price) arrived after deducting the subsidy amount.
Despite this, the government has maintained that the introduction of DBTL will improve the operational efficiency of the LPG subsidy system, and result in significant savings in overall subsidy expenditure. Throughout the process of introducing DBTL there has, however, been a worrying lack of official clarity regarding the scheme’s actual fiscal effects, IISD said.
In early June 2015, Petroleum Minister Dharmendra Pradhan was quoted as claiming that "The scheme [DBTL] has helped us identify and eliminate 40 million ghost connections,” with a senior executive at Indian Oil Corp suggesting that "The government's savings could easily be about Rs10,000 crore linked to these 40 million connections”. This lead to same business daily to conclude that “the Narendra Modi-led central government is set to save a little over Rs10,000 crore in petroleum subsidy…in the current financial year [2015-16] thanks to the successful nationwide rollout of [DBTL]”.
On 2 July 2015, the Chief Economic Advisor stated that “Based on sales and subsidy levels for 2014-15, savings of Rs12,700 crore ($1.98 billion) are estimated from (DBTL)”.
IISD said, the so far provided calculations regarding either its claimed savings from DBTL in FY 2014-15 or projected savings for FY2015-16. The much-publicized fiscal savings figure of Rs12,700 crore, in particular, deserves scrutiny: based on an analysis of publically available data, this figure seems to be a large overestimate, for the following reasons.
1. The current government’s implementation plan for DBTL saw the program initially reintroduced (having previously been partially implemented and subsequently suspended by the earlier United Progressive Alliance-UPA government) in 54 districts in mid-November 2014, with nationwide rollout to all districts from January 2015.
2. Households possessing LPG connections were given three months from the initial introduction of the scheme in their district to register their bank account details for direct payment, during which time they were still able to purchase subsidized cylinders within their quota. Following this period, households would then be able to purchase only non-subsidized domestic cylinders; however, for a further period of three months the equivalent per cylinder subsidy would be recorded and released to the consumer upon DBTL registration.
For a period of seven and a half months from 1 April 2014 until 15 November 2014, the scheme therefore had no direct effect on total subsidy expenditure. DBTL only began to formally restrict access to subsidized LPG for non DBTL-registered households in mid-February 2015, and then only in the 54 districts selected in Phase 1 (representing 8% of total districts). In the remaining Phase 2 districts (constituting 92% of total districts), non-registered households retained formal access to directly subsidized LPG until 31 March 2015.
3. Assuming program implementation on the basis formally announced, the theoretical maximum reduction in subsidy expenditure directly attributable to DBTL in FY2014-15 can therefore be roughly calculated by applying the initial reduction in subsidised consumption (reported as 25%) to the total potential consumption available to existing connections (reported as 23.3 million), then applying the relevant data on monthly under-recoveries and fiscal subsidy to calculate the estimated ‘avoided’ expenditure figure.
Note that this figure will likely represent an overestimate of the total reduction in direct subsidy expenditure achieved, as it assumes that: a) all connections unregistered as of mid-February were operational; b) that all of these connections would have used their maximum allowable allocation of 12 subsidized cylinders (rather than the national average of 6-7 cylinders) on a monthly pro-rata basis; and, c) that none of these connections would subsequently register with DBTL and receive subsidy compensation for the period from mid-February to end March.
Importantly, this figure represents total ‘avoided’ subsidy expenditure, and does not take account of the profile of those connections losing subsidized access (including the percentage of total ‘avoided’ expenditure related to previously valid household consumption).
Calculated on this basis, the maximum potential saving on direct subsidy expenditure from introducing DBTL was about Rs46.9 crore ($7.3 million) in February 2015 and Rs96.4 crore ($15.1 million) in March 2015, leading to a maximum potential saving from restricting access of Rs143.4 crore ($22.4 million) for the financial year—around Rs12,557 crore ($1.96 billion) less than the government’s most recent stated estimate.
"In short, regardless of the potential impact of introducing DBTL on total subsidised LPG consumption, it would be very difficult for the scheme to have delivered significant savings in total subsidy expenditure in FY2014-15, as the vast majority of connected households retained formal access to subsidised LPG under the previous subsidy distribution mechanism," the analysis done by IISD using publically available data shows.
In addition, IISD said, any calculation of savings resulting from DBTL implementation in FY2014-15 should also include the initial and recurring costs of introducing the program to the government (including central and district-level administrations, oil marketing companies and public sector banks), program beneficiaries, and the wider economy.
While some of these costs are widely distributed and challenging to record precisely, information on key areas of operational expenditure—including commission on subsidy payments and advance payments to beneficiaries—is readily available.
For example, the cost of commission on all subsidy payments made through direct transfer (initially set at 1% of total transaction size and proposed to be raised to 2%—a rate that is nevertheless estimated to remain un-remunerative) was in itself largely sufficient to offset any direct saving on subsidy expenditure in FY2014-15.
In the case of the ‘permanent advance’ payments provided to all newly-registered DBTL customers upon initial cylinder booking—the costs of which are currently borne by the public sector oil marketing companies—households that had previously registered under the initial direct transfer scheme in FY2013-14 received an advance of Rs435 per connection, constituting a total payment of Rs1,469 crore ($229.5 million) in FY2013-14.
Under the revised scheme introduced by the National Democratic Alliance (NDA) government, this permanent advance was increased to Rs568 for the period to end March 2015, with payments provided as permanent advance in FY2014-15 alone amounting to Rs5,234 crore ($817.8 million), IISD said quoting reliable sources.
"In order to have an informed discussion regarding the impact of DBTL, both as a program itself and as a proposed model for the reform of kerosene and food subsidies, it is crucial that the government provides detailed and accurate data on the way that subsidy savings are calculated," IISD concluded.