Economy

How the Centre’s Fuel Subsidy Policy has Short-changed Bihar

The more diesel, LPG and kerosene a state consumes, the greater the Centre's fuel subsidy to it. Because they consume less energy than people in richer states like Haryana, Gujarat or Delhi, Bihar's people are effectively bearing a disproportionate share of the burden of subsidising richer Indians for their energy consumption. Credit: Meena Kadri/Flickr

The more diesel, LPG and kerosene a state consumes, the greater the Centre’s fuel subsidy to it. Because they consume less energy than people in richer states like Haryana, Gujarat or Delhi, Bihar’s people are effectively bearing a disproportionate share of the burden of subsidising richer Indians for their energy consumption. Credit: Meena Kadri/Flickr

Despite significant social and economic progress in recent years, the development challenges facing Bihar remain profound. The state, one of the poorest and most populous in the Indian Union, goes to the polls for State Assembly elections in October 2015. Among the issues currently under debate is the granting by the central government of ‘special category status’ to Bihar – a longstanding demand of state politicians across party lines, based partly on a sense of historical discrimination against the state within central government funding allocations.

A key issue frequently unrecognised in these discussions on the fiscal relationship between the central government and poorer states is the inequality between states in the distribution of (centrally-financed) fuel subsidies. In the past decade, fuel subsidies have collectively represented the single largest social transfer administered and funded by the central government. At the national level, the highly regressive social distribution of fuel subsidies, and in particular of diesel and liquefied petroleum gas (LPG) subsidies, is well-documented. Less widely understood is the structural discrimination between states inherent in both current and previous fuel subsidy policies, with consumers and businesses in India’s poorest states receiving a disproportionately low share of total subsidy expenditure.

Throughout the previous decade, Bihar has consistently been the lowest per capita recipient of fuel subsidy transfers amongst all states and Union Territories. Figure 1 below shows total per capita subsidy expenditure, calculated on the basis of per capita consumption of subsidized products, for the 20 largest states and Union Territories in FY 2013-14 (the most recent year for which state-level consumption data is currently available), highlighting the scale of the disparity between states in the receipt of subsidy transfers.

In 2013-14, Bihar received an average per capita transfer of Rs 602 per person. By comparison, Haryana received Rs. 2,556 per capita, Delhi received Rs. 1,967, Punjab received Rs. 1,912, and some smaller states and Union Territories received even more (for example Goa received Rs. 2,903 per person).

1In 2013/14, Bihar was the lowest per capita recipient of subsidy transfers for diesel, receiving less than 10% (Rs. 175 per capita) of the equivalent transfer received in Haryana (Rs. 1,770 per capita), the highest among major states (see Figure 2 below).

2Bihar was also the second lowest recipient of subsidy transfers for LPG in FY 2013-14 (marginally exceeding only Jharkhand, and having previously been the lowest per capita recipient in FY 2012-13), receiving a per capita average of Rs. 170 (see Figure 3 below). This represented approximately one-eighth of the equivalent transfer in Delhi, which received Rs. 1,340 per person.

3Despite being the poorest Indian state, and among the states with the lowest level of access to electricity and LPG, Bihar’s allocation of subsidized kerosene (the one subsidized product whose distribution is directly determined by the central government) was roughly equivalent to the all-India average at Rs. 257 per capita, with several wealthier states – most prominently Gujarat, at Rs. 371 per person – receiving far higher per capita subsidy allocations (see Figure 4 below).

4The cumulative effect of these distortions in subsidy expenditure (which are a direct result of central government decisions regarding the design and implementation of fuel subsidies) is massive, resulting in huge disparities in multi-year resource transfers. For example, in the three most recent years for which state-level consumption data is currently available (FY 2011-12 to FY 2013-14), the central government and associated public-sector enterprises spent a total of Rs 447,771 crore (US $73.6bn) subsidizing diesel, LPG and kerosene – over four times the equivalent central budget allocation to the flagship National Rural Employment Generation Scheme (NREGS) public employment programme. During this period, Bihar consistently received the lowest per capita transfer of all states (at between Rs. 525-625 per person). Table 1 and Figure 5 below show the total per capita subsidy received in Bihar relative to selected states and UTs from FY 2011-12 to FY 2013-14.

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Table 2 shows the approximate per capita difference between the subsidy received in selected states and that received in Bihar for the three years to March 2014, and the total transfer required (on an annual basis) for Bihar to receive the same per capita transfer as that received in the selected states.

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Table 3 then calculates the total transfer required to equalize the transfer received in Bihar and that received in selected states for the three years to March 2014 (without accounting for inflation), and the per capita transfer that this would represent (using 2014-15 population estimates).

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This shows that were Bihar to receive a subsidy transfer equivalent to that received in Haryana for the three years to March 2014 alone, this would require an additional (compensatory) transfer of Rs. 74,008 crore, or Rs 6,859 for every person in Bihar. To achieve parity with Delhi would require a transfer of Rs. 42,087 crore, or Rs 3,900 per person, and to achieve parity with Gujarat would require a transfer of Rs. 28,371 crore, or Rs 2,629 per person.

The author is with the  International Institute for Sustainable Development (IISD)