Tryst with Subsidy

A case study in subsidy leading to wastage. 

Anecdote:

We managed to get a LPG gas connection from Indane after a lot of material and physical efforts about an year back. Before that we had a Jyothi gas connection. The reasons for switching over were simple and as it turned out, simplistic as well – utilize the government subsidy to reduce our costs. While a 12kg LPG cylinder from private players like Jyothi costed us around INR1000, the 14kg LPG cylinder from Indane cost us around INR 500. A saving of 50% we thought, what a steal!

Then a few days back, the matchsticks in my house got over. I light incense sticks daily as a ritual for which I needed matchsticks. I had two options: go out and buy matchsticks or use the gas stove to light the incense sticks. I did a quick calculation – a subsidized gas cylinder costs me INR 8 per day or less. I thought that using LPG for lighting the incense stick would increase my cost very marginally so I decided to use it one day promising to myself that I will get the matchsticks next day. The days turned to weeks and I continued to use the LPG instead of taking the effort of going out and buying the matchsticks.

Inference:

This anecdote shows how keeping the prices of precious resources like water and LPG etc. leads to wastage. LPG is too precious a resource to be used for lighting incense sticks. We import 40% of our LPG from other countries. I am sure there are many people like me who commit this sin of wastage as the costs are too low. As an example, I see buckets of water being wasted for washing cars on a daily basis making me wonder that the cars in India are more hygienic than the people.

Thus, subsidies on all such items that are important and yet in short supply must go. Hence, I welcome the government scheme of linking Aadhaar cards to the LPG consumer number. A consumer will have to pay in full initially and then the consumer can choose to get the subsidy amount transferred to his/her bank account. This is where the people who despise the government giving out free doles can redeem themselves by choosing not to avail the subsidy. I also suspect that the government will gradually make the procedure of getting the subsidy credited to an account more complex which will mean that only those who care for the subsidy will put their energies into it.

How will choosing not to avail the subsidy help?

1. The next time one has the urge to waste a precious resource, the higher costs which truly reflect the scarcity of the good will be an impediment. The lesser the supply, the costlier will be the wastage. It will lead to judicious usage and will also lead to a search for better and more efficient alternatives.

2. It will open up the market for the private players leading to better service. My experience with the private LPG provider was pretty good. The LPG got delivered within a latency of one day and the registration was straight forward. Contrast that with the government enterprises – I was allotted the consumer number an year after applying for it. I had to make three rounds to the agency. One agency asked me to buy stuff like the stove etc. worth INR 10000 to get the connection! Then again, the latency of getting a new cylinder is around two weeks at the very least. Many times the delivery guy comes when no one is at home despite the option of “preferred delivery times”. So one has to get the LPG cylinder on his/her own. So, if all these transaction costs and opportunity costs are taken into account, the government agencies are not a very lucrative option.

Thus, if more people shift to the private agencies, the public sector companies will have to change the way they treat their consumers if they want to be in the game. Moreover, the agencies today feel that since they are doing a favor of giving subsidy to the consumer, they can coerce the consumer into greasing their palms. The consumer also complies willfully. If consumers do not avail of the subsidy then they can question the agencies just as they would if it were a private provider.

3. In general, broad subsidies are a very costly way of public welfare. It is the biggest impediment to innovation. Whilst the government needs to invest in research of alternative sources of energy, it is unable to do so as it spends most of the funds compensating on the subsidies given to people who do not need or deserve them.

If the prices reflect the scarcity of the good, then there will be motivation for innovation from the consumer side, the private players and the government.

Conclusion:

Long years ago, we made a tryst with subsidy. It is fitting that at this solemn moment we take the pledge of dedication to ending broad subsidies and the wastage emanating from it.

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