Health first, fiscal prudence later

The government can balance LPG subsidies and ensure clean fuel consumption in poorer households

March 08, 2021 12:15 am | Updated 04:17 pm IST

Subsidised LPG prices have increased by a massive 50% in this financial year alone, consistently capturing headlines. What would be the impact of this in sustaining the gains of the government’s flagship scheme, the Pradhan Mantri Ujjwala Yojana (PMUY)?

Since 2016, PMUY has provided LPG connections to 80 million poor households to reduce women’s drudgery and indoor air pollution. Providing an upfront connection subsidy of ₹1,600, PMUY helped expand LPG coverage to more than 85% of households. In comparison, less than a third of Indian households used LPG as their main cooking fuel in 2011.

Also read | LPG scheme PM Ujjwala Yojana closed, but only 3 States have become kerosene-free

However, multiple studies assessing PMUY concluded that while access has increased, many new beneficiaries are not consuming LPG in a sustained manner. Large-scale primary surveys by the Council on Energy, Environment and Water (CEEW) suggest that, on average, recent PMUY beneficiaries consumed only about half the LPG compared to long-standing regular consumers. Limited uptake of LPG among poor households has two main reasons. First, the effective price of LPG is not affordable for such households, despite the subsidy. Second, many rural consumers have access to freely available biomass, making it difficult for LPG to displace it. Beyond causing indoor air pollution, biomass use for cooking contributes up to 30% to the ambient PM2.5 at the national level, more than the contribution of transport, crop residue or coal burning.

Changing prices

The recent increases in the subsidised LPG price have made it more difficult for the poor to sustain LPG use. India determines domestic LPG prices based on imported LPG price (we import more than 50% of our consumption). As the pandemic set in, the LPG subsidised price began to rise, even when global LPG prices plummeted, contributing to the refiners’ margins and government finances. However, now with LPG prices rising globally, a 50% reduction in the LPG subsidy budget for FY22 (versus FY21) does not bode well. The government is either banking on low global prices (wishful thinking) or reducing its subsidy burden significantly, even while offering 1 crore new connections under Ujjwala 2.0 in FY22. The government’s lack of transparency in the pricing of subsidised LPG adds further to the citizen's plight. The information about LPG price build-up and subsidy has become more difficult to obtain in recent years. As a consumer, one is no more aware of whether the subsidy reduction or global price changes are changing the subsidised LPG prices.

Better targeting

So, can the Central government tread a tight rope to balance LPG subsidies and ensure sustained clean fuel consumption in poorer households? The answer lies in better targeting of subsidy. Currently, the government provides a uniform subsidy per cylinder to all LPG consumers (PMUY or otherwise). Many long-term LPG users, who are also middle- and higher-income households, will continue to use LPG even at a (higher) unsubsidised price. In contrast, economically poor households need a greater subsidy to make it affordable for them to use LPG as their main cooking fuel.

Also read | 1 crore more free LPG connections in 2 years, easier access to cooking gas planned: Oil Secretary

One approach for such targeting is to rely on the existing LPG consumption patterns of consumers. Provide households exhibiting low consumption or a decline in LPG consumption over time with greater subsidy per cylinder to sustain health gains. Further, the subsidy levels could be dynamic with different slabs reflecting the previous year’s consumption. Alongside, the de-duplication efforts to weed out households with multiple LPG connections must continue to avoid subsidy leakages.

In the post-pandemic rebuilding, the continued support to the economically poor for sustaining LPG use is not merely a fiscal subsidy but also a social investment to free-up women’s productive time and reduce India’s public health burden. This social investment will yield rich dividends in the years ahead through a healthier and productive population.

Karthik Ganesan and Abhishek Jain are Fellows at CEEW

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