While many analysts have spoken of the electoral impact of the Pradhan Mantri Ujjwala Yojana which has, by giving 2 crore LPG connections to BPL households in rural areas, surpassed its target by a third this year—the eventual target is to give 5 crore free connections by 2019—the scheme is much more than just a political gimmick. For over 2 crore rural women who risk their lives every day choking over wood-fired chulhas, the LPG cylinders are nothing short of life-changing. And from even a narrow economics perspective, the prime minister has very carefully crafted the scheme—the fact that global oil prices are so low is, though, an additional benefit.
To begin with, LPG distributors were asked to eliminate duplicate accounts; after which, through a high-pitched #GiveItUp campaign led by the prime minister, over 1.5 crore families were encouraged to give up their subsidies. This was then followed up with income ceilings, beyond which households were denied subsidies. Just getting rid of 3.34 crore fake/duplicate customers allowed the government to save over `21,000 crore over FY15 and FY16. In other words, Ujjwala is the classic example of transferring subsidies from the undeserving to the truly deserving; over a period of time, especially as global crude prices start rising, the income criterion will have to be lowered further as it still covers large sections that are too rich to get the subsidy.
What could speed up the reduction in the numbers using LPG subsidies, of course, is the expansion of piped natural gas grids—this was something the prime minister spoke of a lot during the election campaign in 2014. Since piped gas, as the name makes clear, uses natural gas it is cheaper than LPG which is derived from crude oil. As this newspaper pointed out (goo.gl/vP3zHK), even after accounting for the cost of laying pipelines—for densely-populated cities—piped natural gas is not much more expensive than subsidised LPG; in comparison with non-subsidised gas, it wins hands down.
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So, were more piped gas to be made available, much larger numbers would give up their LPG subsidies. Yet, only 33.2 lakh households had piped gas by October 2016—India has 8 crore urban households. Over the next few years, the government has to push for more piped-gas networks; apart from importing gas from countries like Qatar, the fact that the pricing norms for local producers have finally been eased suggests that production will increase substantially. Were this to happen, with LPG subsidies then sharply lowered, apart from kerosene, this will also mean that most of India’s petroleum sector will be truly reformed, with market-based pricing the norm.