Limits to subsidising access to Liquefied Petroleum Gas in India

This article is part of the series Comprehensive Energy Monitor: India and the World

Background

In 2022 and 2023, responses to questions in the Parliament and to questions raised through the provisions of the RTI act (Right to Information Act) on the use subsidised LPG (liquefied petroleum gas) under the Ujjwala programme were reported. According to the response from public sector LPG retailers to a question raised through RTI, out of 95.8 million recipients of LPG cylinders under the Ujjwala programme, 18.4 million did not return for a refill LPG cylinder and 15 million obtained only one refill LPG cylinder in 2022-23. According to the government response to a question raised in the Parliament, the number of subsidised LPG refills obtained by Ujjwala beneficiaries in a year increased from 3 in 2019-20 to 4.4 in 2020-21 but fell to 3.7 in 2022-23. The limited ability of poor households to use LPG as the primary fuel for cooking, notwithstanding initial subsidies, raises the question of LPG affordability for poor households as well as affordability of LPG subsidies for the government.

LPG affordability: Households

The obvious reason behind limited use of LPG in India is affordability. India is pursuing energy access policies at low levels of economic and social development. Most other countries had much higher per person incomes when energy access (particularly electricity that also met cooking fuel needs) programmes were initiated.

For example, when the rural electrification administration was set up in the United States in 1935, the GDP per person was US$9644 (in 2017 $), which is four times the GDP per person of India in 2022. Even South Africa had more than twice India’s current per person income when it launched its electricity access programme.

India is not industrialising and urbanising as fast as other countries did when programmes for increasing access to cooking fuels were implemented. China, that shared some of India’s challenges in the early stages of its development, supplemented the country’s energy access programmes with initiatives for industrialisation, modernisation and urbanisation (see charts 1 & 2). This increased rural incomes that made cleaner cooking fuels affordable for rural households.

India is not industrialising and urbanising as fast as other countries did when programmes for increasing access to cooking fuels were implemented.

Causality between low household incomes and energy access runs both ways (bidirectional) and, consequently, low demand for energy sources such as LPG is both the cause and consequence of low incomes. Access to LPG can facilitate reduction in poverty (increase in incomes) in the longer term because it can substantially reduce the transaction costs (time and labour) in collecting firewood and in using firewood for cooking. This is especially true for women in poor households in India who are the primary gatherers and users of firewood.  The reduction in transaction costs in accessing and using fuel for cooking can, in theory, increase access to education and remunerative economic activity for women.  This, in turn, could increase household income that will make LPG affordable.

However, in the short-term, poverty can limit demand for LPG as the data on refill numbers for Ujjwala beneficiaries illustrates. The average per person private final consumption expenditure (PFCE) in India was estimated at INR 104,811 in 2022-23. This puts the expenditure on one 14.2-kilogram LPG cylinder, which was in the range INR 1100-1350 across Indian states in August 2023, at about 10 percent of monthly consumption expenditure per person. Households that have to spend more than 10 percent of their income to get modern energy services are said to be in energy poverty. Going by this definition, LPG purchase alone (not including expenditure on more vital energy services like electricity for lighting and petrol for two wheelers) could push single income households into energy poverty.

Low demand for LPG from poor and geographically dispersed rural households also arises from poor service quality in rural areas compared to urban areas. Investment in urban quality infrastructure for LPG distribution in rural areas is seen as unprofitable (wasteful from an economic and social perspective), given the low levels of economic activity and productivity. Low demand for LPG results in poor quality of supply (inconsistent and unpredictable). This, in turn, reduces demand for LPG resulting in a negative cycle of low demand causing poor quality services that further reduces demand. The norm of “poor quality services for the poor” rations public goods such as energy (including but not limited to LPG) by exclusion of rural demand and this constitutes a subsidy from the poor to the rich (more resources are invested in serving rich urban households at the expense of rural households). Exclusion of this sort is, by nature, an economic exclusion that is inherent in the entrenched capitalist economic system, also seen in the provision of most other public goods such as infrastructure, health care, and education. This highlights the presence of deep-rooted socio-economic stratification that is further aggravated by distance and density. Migration to urban agglomerates is the most common response to this predicament whereby the poor move towards better quality energy (LPG and other energy services like electricity) services in urban areas rather than wait for better quality energy services to move to them.

LPG subsidy affordability: Government

Consumption subsidies for LPG were initiated in the 1970s when fear over the safety of LPG use as fuel for cooking limited its adoption by urban households. By the 1990s, safety of LPG use was established promoting widespread adoption of LPG by urban households.  Subsidies for LPG that was largely consumed by relatively affluent urban households were entrenched and suggestion of LPG subsidy reduction resulted in protests against the government. This changed in the 2010s when measures for systematic reduction of LPG subsidies were initiated. Budgetary limits to extending fiscal subsidies, initiatives for direct bank transfer of subsidy benefits to targeted consumers, along with the fall in international price of oil and LPG, facilitated a quiet phase out of LPG subsidies. But increase in the international price of LPG since 2021 and the revelation of the fact that subsidies for LPG access does not often translate into use by poor households has revived interest in the question over LPG affordability.

India is not industrialising and urbanising as fast as other countries did when programmes for increasing access to cooking fuels were implemented.

International price of LPG fell by half from over US$800/MT (metric tonnes) in early 2013 to about US$400/MT in mid-2016. It remained at around US$400/MT till the end of COVID-19 and reached a peak of over US$1000/MT in early 2022. It has since fallen by half to about US$500/tonne in mid-2023. The retail price of LPG in India has, however, increased by almost 166 percent from INR 414/cylinder to INR1103/cylinder in July 2023 in Delhi (chart 3). Most of the increase is accounted for by the decrease in subsidies rather than an increase of international prices (more than 60 percent of LPG demand is met with imports). Direct benefit transfer (DBT) payments touched a peak of INR 435/cylinder in November 2018, after which it fell to about INR 140/cylinder in July 2019. DBT payments increased from about INR 260 billion in 2015-16 to a peak of over INR 315 billion in 2018-19, but has since fallen to about INR 8.5 billion in 2022-23. Clearly, there is a push to reduce the subsidy burden on India’s exchequer.

Sustaining LPG Consumption 

The dilemma of LPG subsidies is addressed in two recent reports, with suggestions for external support for sustaining LPG consumption by poor households. The first report from the G20 suggests LPG carbon credits to encourage the shift away from solid fuels such as firewood in India and other parts of the world where firewood/biomass is the dominant fuel for cooking. The other report by the Energy Transition Advisory Committee of the Ministry of Petroleum & Natural Gas proposes continuation of subsidies for eight LPG refills per household per year along with close targeting of LPG subsidies to households that need it the most. The government could potentially continue with LPG subsidies as proposed by the Energy Transition Advisory Committee to sustain LPG consumption in the short term but push for LPG carbon credits through the G20 platform to sustain LPG consumption in the longer term.

• Energy
• Urbanisation
• Energy Access
• India
• G20 Platform
• infrastructure
• LPG
• poverty
• subsidies
• sustainability
• urbanization

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