Poor Households Can Get Two Times Less LPG Subsidy Than Better-off Consumers in India—Report

New Delhi, April 28, 2021—As millions of Indians await the government’s response to a record increase in the price of liquefied petroleum gas (LPG), experts warn that poor households may benefit two times less than better-off consumers from LPG support if the government doesn’t change the design of the LPG subsidy policy.

According to a new report (How to Target LPG Subsidies in India from the International Institute for Sustainable Development and the Initiative for Sustainable Energy Policy, at Johns Hopkins University),  the poorest 40% of households in rural and urban parts of Jharkhand received less than 30% of government LPG support in FY2019, when LPG subsidies comprised nearly 28% of all central government energy subsidies. 

The government halted LPG subsidies in May 2020 due to low oil prices and consequently lowered domestic LPG cylinder rates. However, LPG cylinder prices have recently increased from INR 594 in May 2020 to INR819 in March 2021, leaving millions of Indians struggling to afford the cooking fuel. Experts warn that LPG price support for poor households is vital and needs to be reintroduced urgently, but the existing policies need redesign to support those who need it the most.

“It's clear that poor households need LPG subsidy so when the government reintroduces LPG subsidies, it should avoid repeating old mistakes and channel benefits toward poor households, who are otherwise compelled to rely on less-clean biomass-based solid fuels,” says the report author, Shruti Sharma. “Rationalizing subsidies will be crucial for steering away from a regressive subsidy regime and saving the government crores during these tough economic times.”

According to the experts, the main bottleneck in improving subsidy distribution is high consumption of subsidized LPG cylinders by better-off households. The majority of India’s rural households continue to use more of the freely available wood and biomass-based fuels instead of subsidized LPG, while better-off households with higher consumption of subsidized LPG end up receiving a larger share of the subsidies. 

Experts highlight that the lack of data on the efficiency of the LPG subsidies has prevented the government from recognizing the inequity in distribution. “Jharkhand’s case study shows clearly that there is a knowledge gap in identifying poor households accurately,” says Sharma. “If we want to fix the problem of unaffordability, targeting is key.”

Experts recommend that focusing subsidy benefits on a narrower subset of beneficiaries can not only support the poorest consumers but also lower the overall program cost. 

The study estimates that poor households in Jharkhand with a Pradhan Mantri Ujjwala Yojana (PMUY) connection consumed only 5.6 cylinders annually—far lower than the current annual limit (or quota) of subsidized cylinders set at 12. Until poor households can increase their LPG cylinder consumption, the government can consider further reductions in the annual limit from 12 to 9 cylinders. The study estimates that this could reduce subsidy expenditure by 14% in rural areas and 19% in urban areas without significantly changing the average distribution of benefits. 

The study also found that there was no good link between poverty and whether or not households were PMUY beneficiaries: there was a mix of low-income and higher-income households among both PMUY and non-PMUY households. This means that trying to focus the subsidy only on PMUY beneficiaries—a commonly aired suggestion over the past several years—might create more problems than solutions. 

In the short term, the Centre must invest in mapping the knowledge gap and identifying the equity of LPG subsidies across India. In the medium term, experts recommend that state governments should consider testing smarter indicators like vehicle ownership to better identify well-off households and restrict their LPG subsidy. “Poverty is contextual, and this report tested interventions for Jharkhand, a state with high poverty, so findings might not be the same for states with lower poverty levels,” said Christopher Beaton, a study co-author. 

The COVID-19 crisis has severely affected the incomes of poor households, further stressing the need to increase their support for LPG subsidies. “The lack of clarity on LPG subsidies may push poor households who cannot afford unsubsidized LPG to using unclean biomass, severely impacting the health of women and young children—already, we found that the poorest households had to dedicate 9%–11% of their monthly expenditure, compared to only 3% among better-off households. The government should consider better targeting of LPG subsidies to increase affordability for the poorest,” said Beaton.