Why ending kerosene subsidy is in the hands of UP and Bihar governments

India’s kerosene subsidy can come down only if state governments of Uttar Pradesh and Bihar lend wholehearted support to lower consumption of the fuel. Incremental increase in kerosene prices, though desirable, will not help the union government or the oil companies to quickly cut losses from selling kerosene.

Uttar Pradesh and Bihar are among leading consumers of kerosene, and therefore major beneficiaries of the Rs 30,575 crore kerosene subsidy that taxpayers and public sector oil companies bore in 2013-14 and about Rs 12,000 crore in April-September 2014.

Here’s why. Millions of homes in the two states do not get electricity in their homes. So, these homes use kerosene lanterns as a source of light. The numbers are shocking. According to Census 2011, 82.4 per cent of homes in Bihar and 61.9 per cent in Uttar Pradesh used kerosene for lighting. That translates into about 15.6 million homes in Bihar and about 20.4 million in Uttar Pradesh, and together about 36 million homes. In all, 31.4 per cent of all homes in India use kerosene as a source of lighting, and that’s about 77 million homes.

The situation would have improved over the last three years across the country and in the two states, but not dramatically. The number of households with access to electricity too is unlikely to have soared, notwithstanding Central Electricity Authority’s claim that 94.7 per cent of villages in Bihar and 98.7 per cent of villages are electrified.

Electrifying a village does not mean electricity is reaching homes of its inhabitants. More often than not, it just means electricity poles were erected and cables taken till those poles. Also, it does not mean that electricity is flowing through those cables and where it does, it would be for a few hours. Over time, these cables get stolen, taking the electrification process backwards. Another problem is the last mile: Connection from these poles to homes often remains incomplete.

Any effort to reduce kerosene subsidy has to be preceded by providing these 77 million homes with alternate source of light – that could come from electricity or solar panels. States such as Jharkhand, Orissa and Assam too have very large proportion of homes depending on kerosene lanterns for lighting.

Raising the retail price of kerosene and targeted supply can only partly address the subsidy problem. Besides, it will take years to make kerosene prices market-linked. This is because the under-recovery on kerosene retail price through public distribution system, despite dramatic fall in crude oil price, is still Rs 27.60 a litre. Under-recovery is the difference between the retail price and the ideal market price of a fuel.

High subsidy on kerosene price also leads to adulteration of diesel – about 45% of kerosene meant for PDS is said to be diverted according to some government estimates. Attempts to plug diversions have yielded no result. That’s because the price difference between a litre of diesel and kerosene is about Rs 40 in Delhi.

If states such as UP and Bihar move quickly to provide more homes with electricity generated from the conventional sources or from renewable sources such as solar panels, their need for kerosene lamps will quickly fall. That will allow oil companies to lower kerosene output and cut losses. Low availability of the fuel will also directly lower quantity diverted for adulterating diesel.