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In September, the Union government decided to slash the subsidy on liquefied petroleum gas (LPG) and capped the number of subsidized LPG cylinders at six cylinders per annum per household. Additional cylinders will be available to consumers at the market rate notified by oil marketing companies. The rationale behind this was to reduce the subsidy bill of the government and prevent diversion of cylinders from residential use to commercial use. This decision was followed by a further increase in the price of cylinders by Rs11.42 in October to compensate the dealers. Yet, in this debate two important issues have slipped under the radar.

First, will the increase in prices retard the considerable progress in reducing consumption of solid (dirty) fuel in urban India? Data from National Sample Survey Office’s (NSSO) survey of consumption expenditure documents considerable progress in the reduction of consumption of solid fuel in urban areas. The proportion of urban households using LPG increased in urban India from 29.5% in 1993-94 to 59% in 2004-05 and further to 66.2% in 2009-10. The per capita consumption of LPG increased from 0.88kg in 1993-94 to 1.6kg in 2004-05 and further to 1.9kg per month in 2009-10. Correspondingly, the per capita consumption of kerosene decreased from 1.42 litres per month to 0.62 litres and further to 0.47 litres over this period. It is reasonable to state that the increase in LPG consumption has been at the expense of kerosene and this is hailed as a welcome development.

Are there foreseeable adverse effects of moving to market-based pricing? Yes, since over 30% of urban households are not using clean fuel and are possibly heavily reliant on firewood and wood chips. It is an empirical fact that households use multiple fuels and they do indeed switch across various types of energy: electricity, LPG, firewood and chips and kerosene. In the event of a price rise, poorer households, in particular, could switch to unclean fuel or switch back to kerosene, which is also subsidized. It should be borne in mind that kerosene does rank below LPG and electricity in the energy ladder. Use of unclean fuels is sought to be decreased, under the Millennium Development Goals, since they cause indoor air pollution.

Second, is the cap of six cylinders per household justifiable? If not, can one arrive at a cap on number of subsidized cylinders in an objective manner? Some insights can be gleaned from NSSO’s survey of consumer expenditure conducted over the period July 2009-June 2010.

Given that the cap on subsidized LPG is at the household level, in the discussion that follows, the estimates presented are at the level of the household and not per person. The estimated number of households in urban India increased from 56.9 million to 68.1 million over 2004-05 and 2009-10. Despite this increase, the total number of households not reporting use of LPG declined only marginally from 23.4 million to 23 million. In every income or consumption decile the estimated number of households using LPG did increase. The average consumption of LPG per household increased from 7kg in 2004-05 to 7.7kg in 2009-10. If we exclude those not reporting any consumption of LPG then the average consumption per household is unchanged: it was 11.8kg in 2004-05 and 11.7kg in 2009-10. Given these numbers, can NSSO data inform the debate on where to set the cap on number of subsidized cylinders? In the media it has been reported that Congress-ruled state governments will offer nine subsidized cylinders every year. It is also reported that Trinamool Congress would like the cap set at 12. The average household uses 11.7kg of LPG, and annually, this works out to 140.4kg. Given that the net weight of a cylinder is 14.2kg, the average household uses 9.9, or approximately, 10 LPG cylinders in a year. So a reasonable number to set the cap would be at 10. Assuming that the government can get the targeting right, a differential pricing might be required even within this cap of 10 cylinders to encourage poorer households to use LPG.

There are two additional related issues. First, whether using a bank account to transfer subsidies in the form of cash is a feasible option given that nearly 42% of households do not have a bank account. Second, do poorer households have the ability to pay the full price of LPG upfront and then go to the bank for reimbursement? And specifically, in the context of availing LPG subsidy, the compelling reasons for introduction of the bank branch as an additional layer is not clear. Common sense suggests that the administrative cost incurred by getting individuals to claim their reimbursement via the banking system will be much larger than if the government transferred subsidy to the companies directly for the prescribed number of cylinders.

Finally, in the context of setting the urban poverty line it should be noted that successive expert groups on poverty have never examined the implications of slashing of subsidies and the move to market-based pricing. This is despite the fact that the share of fuel bill in monthly consumption expenditure has steadily increased in the last two decades.

S. Chandrasekhar and Vijay Laxmi Pandey are faculty members at the Indira Gandhi Institute of Development Research, Mumbai.

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