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Badly needing a targeted subsidy

With the GST compensation cess set to cease soon, the Centre should think of repurposing it to reinstate financial support for LPG consumption by the poorest

Reinstating the subsidy, especially as a universal one is inefficient, and is certainly beyond the means of the current government’s finances.

By Karthik Ganesan

With the latest hike this week, LPG prices in the national capital breached the four-digit mark of Rs 1,000, an important psychological barrier for customers. These successive hikes come at a time when LPG cylinders are already at historically high price-points. The growth in LPG consumption in the household segment, which averaged ~7.5% in the previous five years, dropped to a low of 1.5% in the last financial year. LPG remains the main source of clean cooking in India, given the low penetration of natural gas and electricity-based cooking, barring a few urban centres.

LPG making inroads into the Indian kitchen since its introduction in the 1960s has been slow, on account of its high price and the tight control on its availability and marketing. In 2011, less than a third of Indian households were using LPG as their primary cooking fuel. The India Residential Energy Consumption Survey (IRES) from 2020, conducted by the Council on Energy, Environment and Water (CEEW), suggests that in 2020, that figure has climbed up to nearly 71%, after decades of sustained support to help improve adoption. LPG had a healthy universal subsidy provision up until April 2020. The subsequent withdrawal of the subsidy and the pandemic-induced economic slowdown that hit household incomes have now made LPG unaffordable for a large section of our population. It has certainly lost its sheen, especially for new consumers added under the Pradhan Mantri Ujjwala Yojana(PMUY), who were yet to experience the health benefits that accrue from the sustained use of LPG.

Reinstating the subsidy, especially as a universal one is inefficient, and is certainly beyond the means of the current government’s finances. One often hears that market prices for petroleum products in India are high on account of high levels of taxation, and that subsidies merely offset the taxes levied on crude. However, LPG is unique in that we import nearly 60% of our consumption directly in the product form, at international prices. It is worth mentioning that for over two-thirds of the last seven-year period, subsidised LPG price was at a discount as compared to international prices. Tragically, it is during the Covid-19 pandemic period that retail prices have been at a premium to international LPG prices. Given that there is no clear alternative to LPG in the short-medium term, every effort must be made to incentivise lower-income households to shift to its use by increasing awareness of the economic and health burden of using solid fuels. Increasing the distributor base in the rural areas to make LPG more accessible and CSR programmes to give a first-hand experience to new adopters are very important steps needed to woo the hesitant consumer. However, at the core of the efforts, a targeted subsidy to enable consumption, is a must.

The country must not blink at this prospect of supporting its poor and vulnerable sections. Bringing down LPG costs to affordable levels for the PMUY consumers could come at a cost of ~Rs 33,000 crore a year, if current market prices for LPG persist. With payouts to the states, from the GST compensation cess, well in excess of Rs 1,00,000 crore a year, winding down this June, it is an opportune time for the Centre to repurpose the cess and reinstate financial support that targets the poorest. It is an eye-watering level of support, but it is merely making up for decades of ignoring their needs and subjecting them, and indeed much of the country, to the harmful impacts of solid fuel use. Consider this compelling case for pulling all-stops to finance the consumption of clean fuels by the poor. Between 2002 and 2021, ~Rs 20,000 crore has been spent each year (in constant 2011-12 rupee) in supporting the non-PMUY LPG consumer in India. These are the early adopters, city dwellers and higher-income groups in rural areas. However, only Rs 3,500 crore (in constant 2011-12 rupee) per year has been spent in the last five years, in supporting the poorest consumers (PMUY beneficiaries). Now, there are no signs of a subsidy being reinstated.

The poor, who are disproportionately impacted by prolonged usage of solid fuels must surely be asking, ‘apna time kab aayega’ (when will our time come)? We must, therefore, ask the question: Is it not time to make up for all these years of inaction, when the needs of the poorest consumers were not prioritised, and the Indian state continued to prop up early adopters who have harvested the health and economic benefits of consuming LPG over decades? Many pundits, in their assessment of the outcome of the 2019 elections, attributed the pace and scale of deployment of the PMUY scheme, as one of the main reasons the rural population gave a vote of confidence to PM Modi’s government. Reminders of the scheme dot the urban landscape even to this day. Ujjwala is a powerful brand in itself, and a popular one at that. Letting it die slowly is sending a strong signal and makes a mockery of the administrative efforts that were made in rolling it out in the first place.

Sustained support, in consuming merit goods like LPG, could precipitate behaviour change and wean households away from the reliance on solid fuels. This shift away could play an important role in achieving targets under the National Clean Air Plan as well, and help focus the efforts in reining in the egregious polluters. More importantly, the pursuit of clean cooking will have significant effects on health outcomes, especially that of women and children. To that end, the expenditure on clean cooking must be seen as supplementing and complementing the expenditure on core health programmes that focus on women and children’s health, and on health and family welfare more broadly (a total budget in excess of Rs 1 lakh crore in FY23 is earmarked for these ministries). Thus, it is important to ensure that budgetary allocations targeting health and well-being are reviewed, keeping in mind the interlinkages between indoor and ambient pollution and health outcomes. And, if needed, budgets must be further bolstered to help achieve the desired outcomes of a healthy and productive population that then truly puts us on the path to being ‘atmanirbhar’.

The author is fellow and director, Council on Energy, Environment and Water (CEEW)

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