Support for Clean Cooking in India

Why are LPG subsidies in India important?

India is currently one of the most polluted countries in the world, with air pollution contributing to hundreds of thousands of deaths per year—much caused by burning biomass fuel, such as wood and dung. The health impacts, and the burden of collecting and preparing traditional fuels, falls disproportionately on women and children. The collection of fuelwood for cooking also places huge and unsustainable pressure on the natural environment.

India has, however, improved access to—and use of—cleaner cooking in recent years. Formal access to liquefied petroleum gas (LPG) has expanded rapidly: the number of registered LPG connections has more than doubled from 106 million connections in fiscal year (FY) 2008/09 to 263 million as of the end of FY 2017/18. According to the Petroleum Planning & Analysis Cell (PPAC, 2018a), total consumption of household (or “domestic”) LPG has almost doubled in the last decade, increasing from 10.6 million tonnes (MT) in FY 2008/09 to 20.4 MT in FY 2017/18.

In order to promote the uptake of clean cooking, the Government of India has historically provided significant price subsidies for household LPG. After peaking in FY 2013/14 at over INR 50,000 crore (USD 7.4 billion) due to elevated international prices, formal consumption subsidies declined to a low of around INR 12,000 crore in FY 2016/17 (USD 1.8 billion) before rising again to over INR 20,000 crore (USD 2.9 billion) in FY 2017/18 (PPAC, 2018b).

How have policies changed over the past few years?

LPG in India is primarily marketed by the three main state-owned oil marketing companies (OMCs). Direct purchase of LPG cylinders (both subsidized and unsubsidized) requires possession of a registered LPG connection at an LPG dealership (except for minor volumes marketed through a scheme known as Free Trade LPG). The price of most LPG supplied to the majority of households with an active LPG connection is administratively controlled, with the government providing a subsidy equivalent to the difference between the cost of supply (determined largely by international prices) and the (fixed) retail price. This price gap is termed an “under-recovery,” representing the difference between the cost price incurred by the companies and the price realized upon sale to the final consumer.

The most recent sequence of reforms to LPG subsidy policy began under the previous United Progressive Alliance (UPA) government in 2012 and has altered LPG subsidy policies in the following ways:

Changes to the volume of subsidized LPG accessible to each eligible household.
Changes to the eligibility criteria for accessing subsidized LPG.
Changes to the unit value of the subsidy on a given volume of subsidized LPG.
Changes to the form of LPG subsidy expenditure.

Changes to the volume of subsidized LPG accessible to each eligible household

Prior to September 2012, all LPG supplied via household connections was subsidized, with no restriction on consumption volume. Beginning in September 2012, the then-UPA government introduced a series of caps on the number of 14.2-kg cylinders that each household could purchase:

September 2012: six subsidized cylinders per household per year, with the stated intention of reducing total subsidy expenditure on LPG
January 2013: an increase in quota from six to nine
January 2014: an increase from nine to 12

The National Democratic Alliance government has left this cap unchanged. Households accessing subsidized LPG are currently entitled to use up to 12 subsidized 14.2-kg cylinders per year or an equivalent number of subsidized 5-kg cylinders (with additional cylinders supplied on an unsubsidized basis).

Changes to the eligibility criteria for accessing subsidized LPG

Prior to September 2013, all valid household connections were eligible to access subsidized LPG (up to the cylinder limit) without any further conditions. In June 2013 the then-UPA government launched Direct Benefit Transfer for LPG (DBTL), a scheme to change the method of providing LPG subsidies. The DBTL required households to provide a bank account and an identification number (known as “Aadhaar”) in order to receive the per-cylinder subsidy amount via electronic transfer. While Aadhaar is notionally a voluntary program, households unable or unwilling to provide their Aadhaar number or a bank account were automatically excluded from access to subsidized LPG.

This scheme was introduced in selected districts on a phased basis from June 2013 onward, becoming mandatory to receive LPG subsidies in an increasing number of districts from September 2013 onward. Following extensive operational problems and public opposition, the program was suspended before national elections in January 2014. It was subsequently reinstated in an amended form from November 2014 onward, becoming mandatory nationwide from April 2015.

In March 2015 the government also introduced an expanded and rebranded initiative to encourage households to voluntarily surrender their access to subsidized LPG and purchase cylinders at market rates (a program known as GiveItUp). Households that surrender their subsidized connection are eligible to reapply for subsidies after a year. In January 2016, the government announced income-based exclusion criteria for access to subsidized LPG, excluding all connections of households in which one or more members earned a taxable income of over INR 1 million (approximately USD 14,200) in the previous year (Lok Sabha, 2018c).

The timeline for these changes to the volume of subsidized LPG accessible to each household and the mandatory criteria for accessing subsidized LPG is provided in Table 1.

Changes to the unit value of the subsidy on a given volume of LPG

There have also been a series of changes to reduce the unit value of the LPG subsidy.

Figure 1 charts the fixed price of subsidized LPG and the variable (market-determined) price of unsubsidized LPG from August 2012 to May 2018. The difference between the subsidized price and the international price is shown in blue and represents the per-unit price gap subsidy.

While the price of subsidized LPG was almost completely static between 2012 and 2016 (decreasing in real terms), the total unit subsidy fell dramatically as a result of falls in international prices. This reduced overall subsidy expenditure despite growth in the volume of consumption. In mid-2016 the government instituted a program of gradual increases in the price of subsidized LPG. According to reporting by the Economic Times, this began with monthly INR 2 (USD 3 cent) increases per 14.2-kg cylinder from July 2016 onward and monthly INR 4 (USD 6 cent) increases from June 2017, ending in November 2017.

The final sale price of domestic LPG (both subsidized and unsubsidized) also increased in most states following the introduction of a national Goods and Services Tax (GST) in July 2017. The GST changed the rate of value-added tax (VAT) levied by states and Union Territories (UTs). Previously, states charged a discretionary state-specific rate of between zero and 5 per cent. Under the GST, a uniform rate of 5 per cent was introduced. Figure 1 shows the Delhi Indian Oil Corporation rate, with domestic LPG previously zero-rated for VAT in Delhi. This led to an increase in the final sale price of the domestic LPG (both subsidized and unsubsidized) sold in most states.

Changes to the form of LPG subsidy expenditure

Extending LPG access has been the goal of successive governments. The number of LPG connections has increased rapidly in the past decade, partly as a result of government-directed OMC investments in creating additional LPG supply infrastructure. Despite this, the majority of budgetary expenditure on LPG subsidies by the central government has been directed to price subsidies, with limited direct expenditure on extending access.

In 2010, the previous UPA government announced its intention to introduce a large-scale centrally funded access extension program specifically targeted at below-poverty-line (BPL) households. This scheme replicated access programs pioneered by states such as Andhra Pradesh and Tamil Nadu and involved the payment of the security deposit for the cylinder and pressure regulator on behalf of BPL households (funded using the mandatory corporate social responsibility budgets of the OMCs), with approximately 500,000 connections issued to identified BPL households in 2014.

The government significantly increased expenditure on the scheme in FY 2014/15 and FY 2015/16, issuing over 6 million connections to poorer households. In 2016, and in a context of historically low international LPG prices, the government expanded the program using direct budgetary financing. The rebranded scheme (known as Pradhan Mantri Ujjwala Yojana or Ujjwala) was launched in May 2016 with a target of providing 50 million connections to BPL-classified households by 2019.

In its February 2018 budget, the government announced an increase in the target connections under Ujjwala from 50 million to 80 million, with a commensurate increase in the budget allocation of INR 4,800 crore and an expansion of the relevant eligibility criteria (Lok Sabha, 2018a). Alongside increased expenditure on access, the central government spent an equivalent amount on the implementation of the DBTL program, primarily through advance payments to households.

Figure 1. Subsidized and unsubsidized domestic prices, FY 2008/09 to FY 2017/18

Source: PPAC, 2017b, 2018e, 2018f.

How has the total consumption of LPG changed?

Figure 2. Total and domestic LPG consumption, FY 2008/09¬ to FY 2017/18

Source: Ministry of Petroleum and Natural Gas, 2013; PPAC 2017a, 2018d.

Figure 3. Monthly LPG consumption, September 2010 to May 2018

Source: PPAC, 2018a.

Figure 4. Total registered domestic LPG connections, FY 2008/09 to FY 2017/18

Source: Ministry of Petroleum and Natural Gas,2013; PPAC, 2017a, 2018c.

Total LPG consumption has risen steadily in the past decade in line with rising incomes and increased access, increasing from 10.6 MT in FY 2008/09 to 20.4 MT in FY 2017/18. As consumption has risen, the ratio between domestic and non-domestic consumption has remained stable, with domestic consumption accounting for approximately 86–88 per cent of total LPG consumption.

Figure 2 shows total and domestic consumption for FY 2008/09 to FY 2017/18 (the government does not provide public figures for the breakdown between subsidized and unsubsidized domestic consumption).

Source: Ministry of Petroleum and Natural Gas, 2013; PPAC 2017a, 2018d.

Figure 3 shows the monthly figures for total LPG consumption from September 2010 to May 2018, demonstrating that the only policy intervention that had an immediate and substantial effect on trend consumption of LPG was the institution of a per-household cylinder cap from 2012 onward.

Source: PPAC, 2018a.

How have the total number of LPG consumers changed?

The total number of registered domestic LPG connections has increased rapidly in the past decade, rising from 106 million connections in FY 2008/09 to 263 million in FY 2017/18 (of which 224 million were connections recorded as active). Since 2010 the OMCs have implemented a connection validation and regularization program. This has led to the blocking of over 35 million connections for a number of reasons (principally dormancy).

Figure 4 shows the total number of registered connections (including those classified as inactive or otherwise non-functioning) from FY 2008/09 to FY 2017/18. The growth rate in the total number of domestic connections issued annually had been consistently in the range of 8–10 per cent of total connections from FY 2009/10 to FY 2015/16, before rising to 16 per cent in FY 2016/17 and 12 per cent in FY 2017/18 (with these increases largely due to the Ujjwala program).

Source: Ministry of Petroleum and Natural Gas,2013; PPAC, 2017a, 2018c.

Despite the growth in total LPG connections, the Ministry of Petroleum and Natural Gas estimates that approximately one fifth of households (over 50 million) still had no access to clean cooking fuel as of the end of FY 2017/18 (the ministry provides no estimate of the significantly higher percentage of households that are still using biomass for some or all of their cooking needs).

The government does not consistently report the number of active domestic connections receiving LPG subsidies, but periodic disclosures provide an indication of the number of active connections excluded from access. The number of total active domestic connections on April 1, 2018 was 224 million.

The total number of connections excluded as of the end of FY 2017/18 amounted to 22 million–23 million, or approximately 10 per cent of total active connections (224 million). According to government data, 201 million LPG consumers were receiving LPG subsidies in their bank accounts as on March 19, 2018 (Lok Sabha, 2018b). This indicates that 22 million–23 million active connections were excluded from access. Of these excluded connections, approximately 10 million (or less than 5 per cent of active connections) have had their subsidized access removed as part of the GiveItUp initiative. As of March 2018, the government stated that approximately 800,000 LPG customers (fewer than 1 per cent of active connections) had been blocked from accessing subsidized LPG on the basis of income (Lok Sabha, 2018c).

Consequently, approximately 10 million–12 million active household connections (or 5 per cent of active connections) appear to have been excluded from access to subsidized LPG as a result of non-provision of either bank account details or an Aadhaar number (or both) in the most recent financial year.

How has total subsidy expenditure changed?

Total LPG subsidy expenditure peaked in FY 2013/14 at INR 53,563 crore before falling progressively to a low of INR 15,994 crore in FY 2016/17 (Figure 5). Total subsidy expenditure then rose again to INR 23,477 crore in FY 2017/18. Changes in expenditure are driven mainly by international prices and the value of the rupee against the dollar.

Expenditure on LPG access programs, while having increased in recent years, represents only a small proportion of total LPG subsidy expenditure. Of the total budgetary expenditure on LPG subsidies of INR 157,685 crore over the past five years:

Consumption subsidies accounted for INR 144,250 crore (91.5 per cent).
Expenditure on introducing DBTL accounted for INR 6,876 crore (4.4 per cent).
Expenditure on all centrally financed access programs (including Ujjwala) accounted for INR 6,559 crore (4.2 per cent).

Figure 5. Total LPG subsidy expenditure, FY 2008/09 to FY 2017/18

Source: Comptroller and Auditor General, 2016; Lok Sabha 2012, 2016a,2016b, 2016c, 2017; PPAC 2017a, 2018b, 2018g; Rajya Sabha, 2012.

What is the future of LPG subsidies in India?

Despite the rapid uptake of LPG for cooking, approximately 500 million people in India remain without access to clean cooking fuel. These households are using biomass or kerosene for cooking, both of which cause harmful indoor air pollution. And almost half of the households with an LPG connection were not using it as their primary cooking fuel. Most households practice “fuel stacking,” using a range of fuels depending on price, availability and what is being cooked. Biomass is free, or cheap, and readily available.

Currently, LPG subsidies absorb a large share of resources—mostly because they remain largely untargeted—and as such are the principal pillar of India’s efforts on clean cooking. Achieving universal access to clean cooking will likely require a range of coordinated policies, clean fuels and technologies. No part of the energy puzzle is ever solved by one fuel alone.

One way to promote alternative fuels and reduce subsidy costs is to encourage higher-income households to shift to alternative modern sources of energy, such as biogas or electric cooking with induction stoves.

To expand access to LPG, the government will need to improve its affordability and distribution by:

Setting a retail price for subsidized LPG that ensures its affordability, uptake and regular use by the poorest.
Reducing the administrative hurdles that may exclude those most in need. This includes reviewing the identification requirements to access LPG subsidies, such as possession or submission of Aadhaar.
Providing a free or subsidized stove and initial refill to Ujjwala recipients. Forgive debt for Ujjwala recipients who have outstanding repayments on a stove or initial refill.
Further subsidizing distribution to remote regions and promoting new supply centres.

These changes will have a budgetary cost for the government. There are ways that the government could constrain overall expenditure while improving LPG access, including:

Restricting the total number of subsidized cylinders provided per registered connection from 12 to eight 14.2-kg cylinders per connection per annum.
Better targeting the LPG subsidy based on assessment of income so that it only goes to those who would otherwise be unable to afford LPG (this might include the lower-middle income groups).

To expand LPG use in the non-subsidized market, the government needs to remove restrictions on sales and distribution (except those that ensure health and safety). Improved private sector participation in the market would foster competition and innovation, as well as improve distribution. The government could:

Liberalize restrictions on the import, production and retail of LPG for household use in cylinder sizes of 5 kg and less (including 1-kg and 2-kg cylinders).
Remove the functional monopoly on LPG distribution by allowing unrestricted over-the-counter sales of LPG by OMCs and private companies.

Further reading: International Institute for Sustainable Development (IISD), Energy subsidies in India.

Man behind market stall with colourful spices

References

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