LPG Subsidies for Clean Cooking in India: Trials & Tribulations

By Kapil Narula

Kashmiri flood victims in a queue with their cylinders waiting for Liquefied Petroleum Gas (LPG) distribution in September 2014 in Srinagar, summer capital of Kashmir, India. Source: Photo by Yawar Nazir/Getty Images.

India has the largest number of people in the world without access to clean cooking fuels and technologies — nearly 780 million in 2015, or more than 60 percent of the Indian population. Out of the 240 million households in India, about 100 million households use cooking fuels other than liquefied petroleum gas (LPG). Firewood is the main fuel used for cooking in rural areas along with dung cakes while kerosene is used in urban areas. The rural-urban divide is sharp and data from Census 2011 reveals that 28.5 percent of households in India had access to LPG with 65 percent coverage in urban areas and only 11 percent coverage in rural areas. Apart from lack of clean energy access, the affordability of clean cooking fuels is also an issue of concern.

LPG is a clean and convenient cooking fuel and the Government of India (GoI) has promoted its use for cooking. However, as LPG is expensive, this transition has led to a higher share of expenditure for cooking in the Indian households. In order to make LPG affordable for consumers, the GoI provides a subsidy of INR 162.15 on each cylinder of LPG (as of  April 1, 2018 for sale of a cylinder in New Delhi). The total subsidy burden in 2013-14 was $5.9 billion (INR 400 billion) and was shared by the GoI and the three Oil Marketing Companies (OMCs), Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL), and Hindustan Petroleum Corp. Ltd (HPCL).

LPG subsidy was made available to all consumers irrespective of their income. As a consequence, assessments revealed that only 8.4 percent of the subsidy reached the bottom half of the population and the top two income deciles cornered about 60 percent of the subsidy. These inefficiencies in LPG subsidies and the growing volume of subsidies are a major cause of concern for the GoI which initiated various measures to improve the efficiency of the LPG subsidy scheme. These measures included limiting the number of cylinders for households in 2012, urging richer households to voluntarily give up the subsidy via the “Give it Up” campaign, and removing the subsidy to tax payers earning more than INR 1 million per annum. The government also introduced ‘PAHAL’ which is a Direct Benefit Transfer for LPG (DBTL) where cash subsidy is directly transferred to the bank account of the customer using his or her unique identification linked to the ‘Aadhaar’ card after the purchase of LPG cylinder. According to the government this eliminated 38.5 million duplicate, non-existent and inactive LPG connections and saved $5.7 billion as of January 2018, although this figure is disputed by researchers.

The GoI also launched the Pradhan Mantri Ujjwala Yojna (PMUY) scheme in May 2016 to provide LPG to a large number of poor households which were Below Poverty Line (BPL). The PMUY targeted reaching 50 million households over period of 3 years utilizing the Aadhaar ID numbers. The scheme involves providing a free cylinder and the security deposit for the cylinder to a BPL household. The purchase of the gas stove and the cost of refilling the gas cylinder have to be borne upfront by the customer but it can also be deferred by opting for a monthly installment plan. The LPG subsidy amount is transferred directly to the account of the female head of the family making it a well-targeted cash transfer subsidy scheme. Between the two-year period from May 2016 to April 2018, 36 million households have been provided free LPG connection via 4,000 new LPG distribution centers. Based on the success of the scheme, the PMUY has been expanded with a revised target of 80 million households. Additional allocation of $705 million (INR 48 billion) has been made in the fiscal year 2018-19 over and above $1.1 billion (INR 80 billion) which was provisioned earlier.

There has been a substantial increase in the use of LPG and there were 259.5 million registered domestic LPG consumers as of January 1, 2018 covering an estimated 79.2 percent of the Indian population. However, this growth in LPG demand led to an increase in its import and in 2017-18, LPG imports were estimated at 14 million tons, making India the second largest importer of LPG after China. Promoting LPG also requires additional production, distribution and storage infrastructure to supply the cylinders to the remote parts of the country. Three OMCs are hence investing over $4.4 billion to build LPG import infrastructure, bottling plants and pipeline infrastructure.

Although the PMUY has been successful in increasing LPG access for households, it is reported that many customers have reverted back to traditional fuels after buying the first LPG cylinder due to the high market price of LPG. Further, 88 percent of the LPG-deprived households have cited the high monthly expenditure  as a barrier to continued use of LPG. Hence, in order to increase the regular use of LPG for poor households, the price barrier has to be surmounted. This implies doling out larger subsidies for the new users. From the government’s perspective, this inflates the outflow of money on subsidies as international prices of oil are now on an increasing trend. Further the government is under political pressure to ensure that the domestic prices of commonly used transportation fuels like diesel and petrol do not rise further in accordance with the international market price.

The problem of providing LPG access to BPL families is non-trivial and options for the government are limited. Some of the possible solutions include:

  • To lower the fiscal burden of subsidies the GoI could remove the middle-income group from the set of subsidized consumers and redirect the savings in subsidies to lower income families. While there are clear tradeoffs in this approach, it would reflect the true cost of the fuel for the household and would be more progressive in nature.
  • Electricity is a clean and efficient power source for cooking and therefore induction cookstoves can replace LPG cylinders in urban areas. Electricity supply is reliable in urban areas and with the integration of renewable energy in the electricity grid, electricity generation would become cleaner.
  • Providing low-cost biomass briquettes made from agricultural waste in the rural areas in conjunction with improved cook stoves (ICS).
  • Clean cooking can also be promoted through broader policy interventions like the National Mission on Clean Cooking. This is a part of the National Energy Policy (NEP) which aims to provide 100 percent clean cooking by 2020.
  • Setting up of an enterprise-based model for biogas plants and linking the maintenance of clean cookstoves with the Skill India Mission.
  • The proposed National Bioenergy Mission which addresses biofuels and is expected to be rolled out in 2018, can also be extended to biomass for clean cooking.
  • The National Clean Energy Fund which was created by taxing emissions from use of coal can be utilized for promoting clean cooking technologies.
  • Smaller five kilogram (kg) LPG cylinders which do not lead to large outflow of money from the household can be promoted instead of 14.2 kg LPG cylinders.

In order to control the rising subsidy burden due to an increase in the number of consumers of LPG, the Petroleum Minister announced a reduction in the subsidy by 6 cents (INR 4) every month starting from July 31, 2017 and this was to be continued until the subsidy was eliminated. This move was aimed at delinking the government budget with the international price of crude oil. However, this mechanism was suspended midway in the face of rising international price of crude oil. This flip flop in decision making clearly shows that there is lack of political will to implement tough decisions, especially as the general elections are approaching in 2019. Considering the policy of appeasing the middle class prior to the elections, the window of opportunity for taking further action on lowering subsidies may however be fast closing.

The government’s effort to redistribute and target LPG subsidies has two opposing effects. On one hand elimination of LPG subsidies for middle income consumers decreases the aggregate subsidies. On the other, providing subsidized LPG access to poor households leads to new LPG consumers and this tends to increase the subsidies. The net impact of these dynamics is still uncertain but it is likely that there will be an overall increase in the LPG subsidy burden on the government as the number of subsidized customers is higher than the number of customers axed from the subsidy.

Lack of access to clean cooking is a major challenge for India. Without clean energy access, India would be unable to attain its development targets especially Sustainable Development Goal 7 on energy. While the increase in subsidy outflow due to increased LPG access can be justified as it progressive and has a very large social impact, it also has negative impacts such as increased LPG imports. Lack of affordability for poor households also continues to be a big hurdle. However, it is important that a continued focus is maintained on clean cooking as it will reduce the use of firewood for cooking, will help in lowering indoor air pollution, and will enable environmental protection.

Meeting the contradictory goals of providing affordable clean energy access and lowering LPG subsidies is akin to walking a tightrope. Nevertheless, given the recent success of the government in providing electricity access to 100 percent of Indian villages, this proves that clean energy access for cooking can be provided to all if the government continues to prioritize the effort and maintains its focus.

Dr. Kapil Narula is Senior Researcher in the Chair for Energy Efficiency at the Institute for Environmental Sciences (ISE), University of Geneva.

Share

Leave a Reply

Your email address will not be published. Required fields are marked *