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Issue 1. Volume 2. December 2014

http://www.iisd.org/gsi/

A biannual survey of energy subsidy policies

INDIA ENERGY SUBSIDY REVIEW

• Infiscalyear2013-14,theGovernmentofIndia and associated public sector enterprises spentRs.142,471crore(USD$23.4bn)subsidizingtheretailpricesofdiesel,LiquefiedPetroleumGas(LPG)andkerosene.TheMinistryofFinanceprojectstotalunder-recoveriesofapproximatelyRs.80,000crore(USD$13.1bn)inFY2014-15.

• TheUPAgovernment’spolicyofincrementallyincreasing the retail price of diesel was continuedbythenewly-electedNDAadministration,andasofSeptember2014dieselunder-recoverieshadbeencompletelyremoved. On 18th October 2014 the government announced the formal decontrol ofdieselpriceswithimmediateeffect,withthepublicly-ownedOilMarketingCompanies(OMCs)reducingretaildieselpricesbyRs.3.37perlitre.

• FollowingtheintroductionofaninitialcapontheconsumptionofsubsidizedLPGofsixcylindersperhouseholdinJanuary2013,theUPAgovernmentsubsequentlyincreasedthequota to the current level of 12 cylinders per householdinJanuary2014,whichthenewadministration has not altered. In October

2014 the government announced its intention tofixthetotalsubsidypercylinder,andreintroducetheDirectBenefitTransferforLPG(DBTL)schemepreviouslyadopted(andthensuspended)bytheUPA.InNovember2014itwasreportedthattheper-cylindersubsidywouldbefixedatRs.568fromMarch2015.

• ThereductioninPublicDistributionSystem(PDS)keroseneconsumptionhascontinuedinto2014,withtheNDAgovernmentretainingtheUPAadministration’spolicyofprogressively restricting total supply.

• TheUPAgovernment’sdecisiontorevisetheprice of natural gas prices on the basis of the RangarajanCommittee’srecommendation,initiallyintendedtotakeeffectinApril2014,wasstayedbytheElectionCommission(EC)for the period of the parliamentary elections. Following two further postponements of the decisionbythenewNDAadministration,inOctober 2014 the government announced an increase in the price of gas on the basis of a modifiedversionoftheRangarajanpricingformula,risingfromUSD$4.2permillionBTUtoUSD$5.61permillionBTUwitheffectfrom1stNovember2014.

Highlights

Contents

Highlights

Introduction

Part One: Recent trends in fossil-fuel pricing policy• Diesel • LPG• Kerosene • Recommendations

Part Two: Guest analysisDomesticLPGSubsidyandDistributionin India: From the undeserved to the underservedAbhishek Jain and Karthik Ganesan (CEEW)

DirectTransferofSubsidies:CaseofpilotprojectinKotkasim,AlwarAnjali Ramakrishnan, Madhura Joshi, and Anmol Soni (TERI)

The Last WordTheUnstablePoliticalEconomyofNaturalGasPricinginIndiaSubhomoy Bhattacharjee (Indian Express)

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IndiaEnergySubsidyReviewis published by The International Institute for SustainableDevelopmentInternationalEnvironmentHouse2,ChemindeBalexert,5thFloor1219,Chatelaine,Geneva,Switzerland

Tel +4122917-8748Fax [email protected]

ExecutiveDirector-InternationalInstituteforSustainableDevelopment-Europe MarkHalle

ProgrammeLeader–SubsidiesandSustainableEnergy PeterWooders

AuthorsKieranClarkeandShrutiSharma

Design: The House London Ltd. Web:www.thehouselondon.com

AcknowledgmentsSpecialthankstoKaushikRanjanBandyopadhyay for his valuable input. Any errors are the responsibility of the authors.

For any queries please contact the author at [email protected]’

Indiacurrentlyprovidesconsumptionsubsidiesforarangeofpetroleumproducts.Infiscalyear2013-14,theGovernmentofIndiaandassociatedpublicsectorenterprisesincurredtotalcostsofRs.142,471crore1(USD$23.4bn)subsidizingtheretailpricesofdiesel,LiquefiedPetroleumGas(LPG)andkerosene.

Thenegativesocialandenvironmentalimpactsoffossil-fuelsubsidiesarewidelyacknowledged.Bydistortingpricesignals,petroleumproductsubsidiesartificiallyinflatedemand,leadingtoincreasedconsumptionandassociatedemissionsofgreenhousegasesandotherpollutants.Theydis-incentivizeimprovementsinenergyefficiencyandthedevelopmentofcleanerenergyservices,andcontributetofueladulterationandtrafficking.Fuelsubsidiesarealsotypicallysociallyregressive,andcarryasignificantsocialandeconomicopportunitycostbydisplacingmoreeffective social and infrastructural investment.

ThisisthesecondeditionoftheIndiaFossil-FuelSubsidyReview,abiannualpublicationoftheInternationalInstituteforSustainableDevelopment’s(IISD)GlobalSubsidiesInitiative.

PartOneofeacheditionoutlineseconomicandpolicydevelopmentsaffectingkeyfuels(diesel,liquefiedpetroleumgas,keroseneandnaturalgas),andanalyzesthedynamicsofeachmarket.PartTwofeaturesanalysisbyguestauthorsonissuesrelatedtoenergysubsidypolicyreform.Inthisedition,articlesexaminepotentialreformpathsforIndia’sLPGsubsidysystem,andlessonsfromapilotprogramforelectronictransferofkerosenesubsidies.

Introduction

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(a) Summary of recent policy developments

Diesel:

Inthefirsttwoquartersoffiscalyear2014-15,publicly-ownedOilMarketingCompanies(OMCs)continuedthepolicyofimplementinggradualmonthlyincreasesinretaildieselpricesintroducedbytheUPAgovernmentinJanuary20132.Followingthetemporarysuspensionofscheduledrateincreasesduringtheparliamentaryelections,theOMCsimplementedthedelayedrisesinmid-May3,withtheincomingNDAadministrationconfirmingitsintentionto continue the policy4.Scheduledpriceincreaseswerethenimplementedon1stJune,1stJuly,1st August and 31stAugust,leading(inconjunctionwithaperiodofexchangeratestabilityandfallingoilprices)totheeffectivecessationofdieselconsumptionsubsidiesbySeptember2014.On18th October 2014 the government announced the formal decontrol of diesel prices with immediate effect5,withOMCsreducingretaildieselpricesbyRs.3.37perlitre6.

LPG:

Infiscalyear2014-15(todate)therehavebeennosignificantincreasesintheretailpriceofsubsidizedLPG7. The NDAadministrationhasretainedthepreviousUPAgovernment’sJanuary2014decisiontoincreasetheannualperhouseholdcylinderquotafrom9to12perhousehold.Inaddition,on27th August 2014 the new administration announcedtheremovaloftheseparatemonthlyrestrictiononcylinderreleaseofonepermonth,andproposedthereintroductionoftheDirectBenefitTransferforLPG(DBTL)schemepreviouslyadopted(andsubsequentlysuspended)bytheUPAinJanuary20148. On 18thOctober2014thegovernmentannounceditsintentiontofixthetotalsubsidypercylinder,andreintroducetheDBTLschemeintwophasescommencinginNovember20149. On 10thNovember2014itwasreportedthattheper-cylindersubsidywouldbefixedatRs568fromMarch201510 – an amountRs163.36abovetheaveragepercylinderunder-recoveryrecordedinearlyOctober201411.

Part One: Recent trends in fossil-fuel pricing policy

Issue 1. Volume 2. December 2014

Figure 1: Total diesel, LPG and kerosene subsidy / subsidy as % of GDP (2008/09-2013/14)

Source:ReserveBankofIndia(RBI)(2014),MoPNG(2014b;2014c)

Kerosene:

Infiscalyear2014-15(todate)therehavebeennoincreasesintheretailpriceofPDSkerosene.TheNDAgovernmenthasthusfarretainedthepreviousadministration’spolicyofprogressivelyreducingtotalPDSkeroseneallocations.Inaddition,thenewgovernmentisreportedlyconsideringthephasedadoptionoftheDirectBenefitTransferforkerosene(DBTK)schemepreviouslypiloted(butnotadopted)bytheUPA12.

Natural gas:

InJune2013theUPAadministrationannounceditsintentiontorevisethepriceofnaturalgassuppliedundertheAdministeredPriceMechanism(APM),withthepotentialtosignificantlyaffectinputpricesinkeysectorsandincrease related power and fertilizer subsidy outlays13. The scheduled revision to gas prices on the basis of the RangarajanCommittee’srecommendedformula,notifiedinJanuary2014andinitiallyintendedtotakeeffectinApril2014,wasstayedbytheElectionCommission(EC)fortheperiodoftheparliamentaryelections14. On June 25ththenewNDAadministrationthenannounceditsintentiontopostponeafinaldecisiononpricerevisionforaperiodofthreemonthswiththestatedaimofallowingconsultationswithkeystakeholders15. On 24thSeptemberthegovernmentthenannouncedafurtherpostponementofthedecisionto15thNovember201416. On 18th October 2014thegovernmentannouncedanincreaseinthepriceofgassuppliedundertheAPMonthebasisofamodifiedversionoftheRangarajanformula,risingfromUSD$4.2permillionBTUtoUSD$5.61permillionBTU17 with effect from 1stNovember2014until31stMarch2015,withfuturepricerisestobeimplementedonabi-annualbasis18.

(b) Overview of current fuel subsidy expenditure

Infiscalyear2013-14,totalfuelsubsidyexpenditureondiesel,LPGandkerosenefellfromtherecordhighofRs.163,759crore(USD$26.9bn)-or1.74%ofGDP-in2012-13toRs.142,470crore(USD$23.4bn)(1.36%ofGDP)19 (Figure1).Drivenbyfallingcrudeoilprices(seeFigure2),astabilisationinthevalueofthedomesticcurrency,andsuccessfuldieselpricereform,totalunder-recoveries(theprincipalcomponentoftotalsubsidyexpenditure)forFY2014/15areprojectedtodecreasetoapproximatelyRs.80,000crore20.

Issue 1. Volume 2. December 2014 5

Figure 2: INR/USD exchange rate and price of crude oil basket (August 2012-Sept 2014)

Source:BankofEngland(n.d.),MoPNG(2014e;2014k)

Retailpricesofdesignatedfuelproductsarecurrentlysubsidizedthroughtwomechanisms:(OMC)‘under-recoveries’,anddirectfiscalsubsidies.Thecentralgovernmentregulatesthepriceatwhichthepublicly-ownedsectorOMCs-OilCorporationLimited(IOCL),BharatPetroleumCorporationLimited(BPCL)andHindustanPetroleumCorporationLimited(HPCL)-cansellcertainpetroleumproducts,leadingto‘under-recoveries’(representingthedifferencebetweenthecostpriceincurredbythecompaniesandthepricerealizeduponsaletothefinalconsumer).TheseappliedtoallthreesubsidizedfuelproductsinFY2013/14,andconstitutedthelargemajorityoftotalsubsidies(accountingforover98%oftotalexpenditure).Directfiscalsubsidiesaredirectbudgetaryexpendituresappliedonafixedunitbasis,andapplyonlytoPDSkeroseneanddomesticLPG.

Source:MoPNG(2014b;2014i)

Figure 3: Under-recovery, total and by fuel (2012/13 and 2013/14)

Figure 5: Total under-recovery by product (July 2012-June 2014)22

Source:MoPNG(2014b)

Source:MoPNG(2014b;2014i)

Figure 4: Total subsidy by product (2005/06-2013/14)

Dieselsubsidies,whichconstitutedthesinglelargestcomponentoffuelsubsidyexpenditureinsixofthelasteightyears(Figure4),decreasedtoRs.62,837crore(USD$10.3bn)inFY2013-14fromtheirrecordhighofRs.92,061crore(USD$15.1bn)inFY2012-13.AsaresultofongoingdieselpricereformandanincreaseintheperhouseholdcylinderquotainJanuary2014,inthelastquarterofFY2013-14(January-March)LPGunder-recoveriesexceededdieselunder-recoveries,withthegapincreasinginthefirstquarterofFY2014-15(Figure5).Dieselunder-recoveries21 continuedtofallthroughoutQ2FY2014-15(July-September),withtheOMCsrecordingnetprofitsonthesaleofdieselfrommid-Septemberonwardspriortotheformaldecontrolofdieselpriceson18th October.


Figure 6: Distribution of under-recoveries (2006/07-2013/14)

Source:MoPNG(2014n),GoI(2013;2014)

Subsequenttotherealizationofproductunder-recoveriesbytheOMCs,thegovernmentdistributesthetotalsubsidycostbetweentheexchequer(throughdirectbudgetarytransferstothecompanies,and,priorto2009/10,throughtheissueofgovernment-backedoilbonds),theOMCs,andthemainupstreamandmidstreamPublicSectorUndertakings(PSUs)23.Infiscalyear2013-14,theUPAgovernmentcontinuedthepracticeadoptedinFY2012-13ofdividingthecostofunder-recoveriesalmostentirelybetweenthegovernmentbudget(Rs.70,772crore,representing50.6%oftotalunder-recoveries)andthebalancesheetsoftheupstreamandmidstreamPSUs(Rs.67,021crore,or47.9%oftotalunder-recoveries)(Figure6).

BOX 1: External sector

Infiscalyear2013-14India’scurrentaccountdeficitdeclinedsignificantlytoUSD$32.4bnfromapreviousrecordhighofUSD$88.2bninFY2012/13(seeFigure7),drivenprimarilybyasubstantialreductioninthevalueofimports(dueinparttorestrictionsongoldimports),andariseinthevalueof merchandise exports24.

Figure 2: Petroleum trade balance (2006/07-2013/14) Balance (2006/07-2013/14)27

Source:RBI(2014)

Figure 7: Imports, Exports, Trade Balance, Net Invisibles and Current Account Balance (2006/07-2013/14)

Source:RBI(2014)

India’soilconsumptionremainshighlyimport-dependent,withimports(predominantlycrude)representing77.6%oftotalconsumptioninFY2013-14(itwas77%inFY2012/13and75.9%inFY2011/12)28. The share ofoilandpetroleumimportsintotalimportshasincreasedsignificantlyinthepreviousfouryears,risingfrom27.7%inFY2010-11(USD$105bn,withintotalimportsofUSD$369.8bn)to36.7%inFY2013-14(USD$165.2bn,withintotalimportsofUSD$450.1bn)(seeFigures9and10).

Thepetroleumtradebalanceremainedlargelyunchangedfromtheprecedingtwoyears,withtotalimportsbyvaluefallingby1%toUSD$155.2bn(havingpreviouslyexpandedfromUSD$86.6bntoUSD$153.9bnbetweenFY2009-10andFY2011-12-anincreaseof77.8%)25.Petroleumexports(consistingentirelyofrefinedproducts)increasedby3.1%comparedtoFY2012-13,resultingina3.5%reductioninnetimports(fromUSD$98bntoUSD$94.6bn)(seeFigure8).Crudeimportscontinuedtoconstitutethelargemajorityoftotalimports,accountingfor92%byvolumeandvalueinFY2013-1426.

Source:MoPNG(2014f)

Figure 8: Petroleum trade balance (2006/07-2013/14)27

Figure 9: Oil and petroleum product imports within total imports (2010/11-2013/14)


Source:RBI(2014)

Figure 10: Total POL imports / POL as % of total imports (2010/11-2013/14)

Diesel

Dieselisusedinawiderangeofsectorsincludingtransport,agricultureandpowergeneration,andisprincipallysuppliedthroughretailoutletsoperatedbythethreepublic-sectorOMCs.Afteradecadeofconsistentyear-on-yeargrowth,totaldieselconsumptionrecordedafullyeardeclineof1%inFY2013-14(Figure11).Following12monthsofstaticornegativemonthlygrowthinFY2013-14,dieselconsumptionregisteredpositivemonthly(year-on-year)growth from May to August 201429,beforedecliningmarginallyinSeptember2014(Figure12).

Figure 11: Annual diesel consumption (2006/07-2013/14)

Source:MoPNG(2014a)

Figure 12: Monthly diesel consumption (Sept 2012-Sept 2014)

Source:MoPNG(2014a;2014h)

Asaresultofpricereformmeasures,astrengtheningdomesticcurrencyandfallinginternationaloilprices,quarterlydieselunder-recoveries(bothinabsolutetermsandasashareoftotalproductunder-recoveries)declinedrapidlyinthefirsthalfof2014,decreasingfromRs.15,182croreinQ4FY2013-14(January-March)toRs.9,037croreinQ1FY2014-15(April-June)(seeFigure13).FollowingthefurtherscheduledmonthlypricerisesimplementedinJulyandatthebeginningandendofAugust-andcoincidingwithaperiodofcontinuedexchangeratestabilityandoilpriceweakness-unitunder-recoveriesondieselhadbeencompletelyremovedbySeptember(withOMCsrecordingnetprofitsonthesaleofdieselfrommid-Septemberonwards).On18th October 2014 the government then announced theformaldecontrolofdieselprices,allowingtheOMCstopricedieselonacost-recoverybasis30.

Figure 13: Diesel under-recovery (2006/07-2013/14)

Source:MoPNG(2014b)


LPG

LPGisprimarilyusedforresidentialcooking,withadditionalusesforresidentialheating,commercialcookingandheating,transportandindustrialprocesses.DirectpurchaseofLPGcylindersintheformalsectorrequirespossessionofaregisteredLPGconnectionatanLPGdealershipsuppliedbyoneofthethreepublicsectorOMCs.Forhouseholduse,LPGislargelysuppliedin14.2kgcylinders,andissoldatbothdomestic(subsidized)andcommercial(non-subsidized)rates.

TotalLPGconsumptionhasincreasedsubstantiallyinthepreviousdecade,risingfrom10.85millionmetrictonnes(MMT)inFY2006-07to16.33MMTinFY2013-14-anincreaseof50%(Figure14).TotalmonthlyLPGconsumptionhasincreasedrapidlyonayear-on-yearbasisfromSeptember2013onwards-withanaverage(year-on-year)monthlyincreaseof9.9%betweenSeptember2013andSeptember2014(Figure15)-reflectingtheimpactofincreasesintheper-householdsubsidizedcylinderquota(andassociatedbaseeffect),andthecontinuedadditionofnew connections31.

Figure 14: Annual LPG consumption (2006/07-2013/14)


Figure 15: Monthly LPG consumption (Sept 2012-Sept 2014)


Infiscalyear2013-14,totalLPGsubsidies(includingbothunder-recoveriesanddirectbudgetarysubsidies)amountedtoRs.48,378crore(USD$7.9bn),representing34%oftotalfuelsubsidies32.Inthemostrecentfinancialyear,domestic(subsidized)LPGretailedatafixedpriceofRs.410.5-414per14.2kgcylinderrelativetoanaveragetotalcostofapproximatelyRs.936,representingasubsidyofaroundRs.522percylinder(or56%oftotalcost–seeFigure16)33.

TotalLPGunder-recoverieshavegrownstronglyinthepreviousfouryears,increasingfromRs.21,772crore(USD$3.6bn)inFY2010-11toRs.46,458crore(USD$7.6bn)inFY2013/14(Figure17).DirectsubsidieshavedeclinedfromahighofRs.2,137(USD$351m)croreinFY2011-12toRs.1,920crore(USD$315m)inFY2013-14(Figure18),reflectingareductioninthetotalconsumptionofsubsidizedLPGbyvolume.

Figure 16: Domestic LPG price breakdown (2013/14)

Figure 17: LPG under-recovery (2006/07-2013/14)

Source:MoPNG(2014c;2014d;2014n)

Source:MoPNG(2014b)


Figure 18: LPG direct subsidy (2006/07-2013/14)

Source:MoPNG(2014c)

Kerosene

Keroseneor“SuperiorKeroseneOil”(SKO)isprimarilyusedatahouseholdlevelforlightingandcooking,withadditionalusesinindustrialprocessesandasafuelforgenerators,pumpsets,freightandpassengervehicles,andagricultural machinery.34Subsidizedkerosene,whichconstitutesthelargemajorityoftotalkeroseneconsumed,isprovidedthroughthePublicDistributionSystem(PDS),anationwidesystemofpredominantlythird-partyrunFairPriceShops(FPS)(administeredatthestatelevel)throughwhichthecentralandstategovernmentsdistributesubsidizedfood,keroseneandothercommoditiesonthebasisofhouseholdrationcardallocations35.

Totalkeroseneconsumptionhasdeclinedsubstantiallyinthepreviousdecade,fallingfrom10.2MMTinFY2003-04to7.2MMTinFY2013-14-adeclineof30%(Figure19).Totalmonthlykeroseneconsumptioninthepasttwoyearshasexhibitedasimilarlyconsistentdownwardtrend,withanaverage(year-on-year)monthlyreductionof4.4%betweenSeptember2012andSeptember2014(Figure20).

Figure 19: Annual kerosene consumption (2006/07-2013/14)

Source:MoPNG(2014a)

Figure 20: Monthly kerosene consumption (Sept 2012-July 2014)


Unliketheotherdesignated“sensitive”petroleumproductssubjecttopriceregulation(LPG,andpreviouslydieselandpetrol),thecentralgovernmentpre-determinesthevolumeofPDSkeroseneavailableforconsumption.Per-statePDSkeroseneallocationsarecalculatedbytheMinistryofPetroleumandNaturalGas(MoPNG)andkeroseneis released for delivery on a quarterly basis36,withtheDepartmentofFoodandCivilSupplieswithineachstateandUnionTerritory(UT)responsibleforensuringupliftofquotaallocationanddistributiontoretailoutlets37.

Thecentralgovernmenthasattemptedtocontainkeroseneuse(andrelatedsubsidies)forseveralyearsbyprogressivelyreducingtheavailabilityofkerosenewithinthepublicdistributionsystem38. The average rate of reductionintotalannualPDSkeroseneallocationshasincreasedsignificantlyintheperiodfromFY2009-10onwards,withallocationsfallingby7.9%,8.5%and4.2%in2011-12,2012-13and2013-14respectively.

InFY2013-14,totalkerosenesubsidiesamountedtoRs.31,256crore(USD$5.1bn),representing19.1%oftotalfuel subsidies39.Barringminoramendmentstodealercommissionsandotheradjustments,theretailpriceforPDSkerosenehasincreasedonlytwicebetweenMarch2002andSeptember2014.40Inthemostrecentfinancialyear,PDSkerosene41retailedatafixedpriceofRs.14.96perlitrerelativetoanaveragetotalcostofRs.49.76,representingasubsidyofRs.34.80perlitre(or70%oftotalcost–seeFigure21).

Figure 21: PDS kerosene price breakdown (2013-14)

Source:MoPNG(2014c;2014d;2014n)


Figure 22: Kerosene under-recovery (2006/07-2013/14)

Source:MoPNG(2014b)

Figure 23: Kerosene direct subsidy (2006/07-2013/14)

Source:MoPNG(2014c)

Asaresultofdieselpricereforms,thepricedifferentialbetweenPDSkeroseneanddiesel(theprincipalfuelitisusedtoadulterateorsubstitute)continuedtoincreaserapidlythroughoutFY2013-14andthefirsttwoquartersofFY2014-15,risingtoarecordhighofRs.44.01perlitreinSeptember2014beforefallingtoRs.40.64inOctober2014withtheformaldecontrolofdieselprices(seeFigure24).

Totalkeroseneunder-recoverieshavegrownsignificantlyinthepreviousfouryears,increasingfromRs.19,484crore(USD$3.2bn)inFY2010-11toRs.30,575crore(USD$5.0bn)inFY2013-14(Figure22).DirectsubsidieshavedeclinedconsistentlyfromRs.978crore(USD$161m)inFY2007-08toRs.681crore(USD$112m)inFY2013-14,reflectingareductioninthetotalconsumptionofsubsidizedkerosenebyvolume(Figure23).

Figure 24: PDS kerosene and retail diesel price differential (Aug 2012-Oct 2014)

Sources:MoPNG(2014d;2014j)

Recommendations

Diesel

- Despitethedecontrolofretaildieselprices,therestillremainsalargepricedifferentialbetweendiesel andpetrolprices,reflectingpreferentialtaxationondiesel.Movesshouldbeundertakentorevisediesel taxation upwards on an incremental monthly basis over time until tax parity with petrol is reached. Thisshouldbecombinedwiththeformulationandimplementationofacoherentlong-termfueltaxation policyaccuratelyreflectingtheexternalitiesgeneratedbydifferentfuels.

- Contemplateandmap-outadditionalfiscalmeasurestoenhancetaxrecoveryfromfuelmarketswithan initialfocusonenhancedtaxrecoveryfromend-useconsumptionbyhigherincomehouseholds (particularlyprivatevehicleuse),through,forexample,higherluxuryvehicletaxes.

LPG

- TheGlobalSubsidiesInitiativehasarguedagainsttheefficacyoftheDBTLprogramforLPGforreasons ofadministrativeefficiency,equityandcost.TheproposedreintroductionoftheDirectBenefitTransfer forLPG(DBTL)schemeshouldthereforebesuspendedpendingimprovementsinfinancialinclusion, subsidy targeting and ease of implementation.42

- Applyasignificantlylowercaponthetotalnumberofsubsidizedcylindersavailableperhouseholdper annum,whichismoreinlinewithaverageconsumptionandwhichthereforecapssubsidybenefitsfor largerandwealthierLPGusers.

- RestructureLPGsubsidymechanismtoprovidebasicLPGaccesstoallhouseholds(whilereducingtotal subsidyexpenditure)throughthefollowingsteps:

• modifythedistributionofsubsidyexpendituretoincreaseunitsubsidypercylinder(indexed toinflation)whiledecreasingtotalcylinderallocationthroughbettertargetingofsubsidy distribution(whichcouldinitiallybeachievedthroughalowerperannumcapinsubsidised cylinders); • universaliseabilitytoaccesssubsidizedLPGthroughfreeprovisionofLPGstovesand associatedequipmenttoallnon-connectedhouseholds; • provideuniversalaccessbasedondemandto5kgcylindersforsubsidizedLPGprovision • investinadditionaldistributioninfrastructure,networksandoperators.

- Reformthedistributionandmarketingofnon-subsidizedLPG,includingregularisationoftheproduction and(non-connection)saleofsmallervolume(e.g.,2.5kg)cylinders.


Kerosene

- Providetwofree(solar-compatible)LEDlampstoallruralhouseholdscurrentlywithoutafunctioning household electricity connection.

- IntroducephasedmonthlyincreasesinPDSkerosenepricingofRs.1.50permonth.

- IncreaseretailercommissionforPDSkerosenesaleby75%,withadditionaladjustmentsubsequentto calculation of viability levels.

1 AllfiguresinIndianRupees(INR)unlessotherwisestated.Onecroreisequivalentto10million.USD/INRexchangerate:$1=Rs.60.8754.

2IncreasingbytheequivalentofapproximatelyRs.0.50permonth(notethatpricingofbulksupplieshadpreviouslybeendecontrolledfromJanuary2013).

3EconomicTimes(2014).

4PressTrustofIndia(2014a).

5MoPNG(2014p)

6HindustanTimes(2014).

7FromOctober23,2014,dealer’scommission(thecostofwhichispassedthroughtothefinalretailprice)forbothsubsidizedandnon-subsidizedLPGsaleswasincreasedbyRs.3.50percylinder(PressTrustofIndia,2014b).

8BusinessStandard(2014a).

9Coveringaninitial54districtsfrom15thNovember2014,andallremainingdistrictsfrom1stJanuary2015(CCEA,2014).

10Ranjan(2014).Itiscurrentlyunclearifthisrepresentsa(notional)maximumsubsidy–seealsoMehra(2014).

11MoPNG(2014o).NotethatthisassumesthecontinuationoftheRs22.58fiscalsubsidy.

12SeeforexampleSurabhi(2014).

13Mehdudia,S.(2013).

14Reuters(2014).

15TheHindu(2014).

16BusinessStandard(2014b).

17OnaNetCalorificValue(NCV)basis.OnaGrossCalorificValue(GCV)basis,thepricewasincreasedfrom$3.79to$5.05permillionBTU.

18Usingpricedatafromthepreviousfourquarters(withaone-quarterlag)(MoPNG,2014q).

19Includingunder-recoveriesfordiesel,domesticLPGandPDSkerosene,anddirectsubsidiesfordomesticLPGandPDSkerosene.Thisfiguredoesnotincludefurthercostsincurredbypublicly-ownedOilMarketingCompanies(OMCs)inrelationtogasimportationandcorporateborrowing(duetodelaysinreceiptofcompensatorypayments),freightsubsidiesadministeredundertheFreightSubsidyScheme(2002),centralgovernmenttransferstoselectedstateswiththe(nominal)purposeofcompensatingfarmersfordieselconsumptionduringperiodsoflowrainfall,subsidyexpenditureonLPGandkerosenesuppliedtoBhutan,customsduty,exciseorsalestaxexemptions,state-levelpricesubsidies,oranydirectorindirectsubsidyexpenditure related to natural gas.

20SeeforexampleDey(2014).

21 Reported fortnightly on a unit basis.

22 Fiscal subsidy data is not currently reported on a quarterly basis.

23PrimarilyOilandNaturalGasCompanyLimited(ONGC),andtoalesserextentOilIndiaLimited(OIL)andGasAuthorityofIndiaLimited(GAIL).

24Inacontextofdomesticcurrencyweakness.

25Partlyasaresultofasubstantialexpansioninexport-focusedrefiningcapacity,withproductexportsincreasingbyUSD$28.7bnbetweenFY2009/10andFY2011/12.

26MoPNG(2014f).

27NotethatthefiguresforoilimportsandexportsprovidedinMoPNG(2014f)differfromthosepresentedinRBI(2014).

28ForfurtherdetailsseeMoPNG(2014g;2014d).

29Reflectinginpartthebaseeffectresultingfromthepreviousyear’spricereforms,andtheirattendanteffectondemand.

Notes

30ResultinginaretailpricereductionofRs.3.37perlitre(HindustanTimes,2014).

31Withanadditional58.75lakhnewconnectionsand35.65lakhDoubleBottleConnections(DBCs)addedbetweenAprilandAugust2014(MoPNG,2014l;2014m).

32Inaddition,theIndiangovernmentsubsidisesallLPGsuppliedtoBhutanthroughthebudgetoftheMinistryofExternalAffairs(MEA).InFY2012-13IOCsuppliedatotalof7,312tonnesofLPGtoBhutan(PressTrustofIndia,2013),incurringanestimatedsubsidyofapproximatelyRs.23crore.TheMEAbudgetedatotalofRs50croreforfuelsubsidiestoBhutaninFY2013-14(includingbothLPGandkerosene)(MEA,2014).

33ThepricefordomesticLPGwasraisedbyRs.3.5(fromRs.410.50toRs414)on11thDecember2013,andthereforeaveragerealisedpriceandtotalsubsidyfiguresdifferslightlyfromthosepresented(fiscalsubsidywasfixedthroughoutFY2013/14).Under-recoveryrepresentsaverageunitunder-recoveryreportedbytheMoPNGforFY2013/14.AllpricesrelatetoIOCinDelhi(thefinalretailpriceofdomesticLPGvariesbetweenstatesandUnionTerritories(UT)duetodifferencesinstate-leviedtaxesandothercharges).

34Bothdirectlyandasanadulterant(primarilyfordiesel).

35NotethatPDSentitlementcriteriaandallocationsdifferbystate–foranoverviewofeligibilitycriteriaandallocationsinselectedstatesseeSinghandJaiswal(2008).

36WiththeexceptionofJ&KandLakshadweep(MoPNG,2013b).

37NotethatPDSallocationsdifferfromfinalPDSconsumptionduetovaryingratesofquotautilisationbystates.

38SeeforexamplePlanningCommission(2011).

39Inaddition,theIndiangovernmentsubsidizesallkerosenesuppliedtoBhutanthroughthebudgetoftheMinistryofExternalAffairs(MEA).In2012-13IOCsuppliedatotalof4,311tonsofkerosenetoBhutan(PressTrustofIndia,2013),incurringanestimated subsidy of approximately Rs. 18 crore.

40IncreasingbyRs.3perlitreinJune2010andRs.2perlitreinMay2011.

41UsingtheIOCDelhibenchmarkrate.NotethatthefinalretailpriceofPDSkerosenediffersbetweenstatesandUnionTerritories(UT)duetovariationsinstate-leviedtaxesandothercharges.

42ThereisnocasefortheintroductionofDBTLonthegroundsofequity,administrativeefficiencyorfiscalresponsibility.DBTLdoesnotdecouplereceiptofsubsidyfromfuelconsumption(subsidyreceiptremainscontingentonthepurchaseofLPG),nordoesitapplyanyformoftargetinginselectingbeneficiaries.TheDBTLmechanismreducesthenetvalueofthesubsidytotheconsumer,increasestheadministrativecostofdeliveringthesubsidy,exacerbatestheregressivedistributionofsubsidyexpenditure,andwillnotsignificantlydecreasetotalfiscaloutlay(potentiallyevenincreasingit).ForfurtheranalysisseeGSI(2014a;2014b).

References

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GSI(2014b)‘SubsidiestoLiquefiedPetroleumGasinIndia:AnassessmentofthedirectbenefittransferinMysore’,Geneva:InternationalInstituteforSustainableDevelopment

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Gupta,P.(2014,September24).EstimatingkeroseneleakagesfromthePublicDistributionSystem. Ideas for India. Retrieved from http://ideasforindia.in/article.aspx?article_id=348


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Mehdudia,S.(2013,July27)‘Despiteopposition,Cabinetapprovesgaspriceincrease’.The Hindu. Retrieved from http://www.thehindu.com/business/Industry/despite-opposition-cabinet-approves-gas-price-increase/article4857220.ece?homepage=true

Mehra,P.(2014,November12)Govt.LPGsubsidycappedatRs.20akg.The Hindu. Retrieved from http://www.thehindu.com/news/national/govt-lpg-subsidy-capped-at-rs-20-a-kg/article6588020.ece

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Ranjan,A.(2014,November10.LPGsubsidyfixedatRs568,pricetochangeafterMarch.Indian Express. Retrieved from http://indianexpress.com/article/business/business-others/lpg-subsidy-fixed-at-rs-568-price-to-change-after-march/99/

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Part Two: Guest analysis

Domestic LPG Subsidy and Distribution in India: From the undeserved to the underserved AbhishekJainandKarthikGanesan(CEEW)

LiquefiedPetroleumGas(LPG)isincreasinglybecomingakeyfuelfordomesticcookingandheatinginIndia,especiallyinurbanareas.Amongalltherefinedproductsconsumedinthecountry,LPGranksthirdandaccountsfornearly9percentoftheenergyconsumedthroughderivedproducts,behindhigh-speeddieselandrefineryfuel(CentralStatisticsOffice[CSO],2013).Morethan85%ofLPGconsumptioninIndiaiseffectivelyimported–eitherthroughtheimportofcrudeorofthe product directly.

Nearly90percentoftheLPGconsumptionisaccountedforbyhouseholds(MoPNG,2013).However,accordingtotheCensus2011,only28.5%ofhouseholdsstatedthatLPGwastheirprimarycookingfuel,whilethefiguresondomesticconnectionssuggestthatnearly47.5%ofhouseholdshadLPGconnectionin2010-11i44 . This clearly indicates that there isacontinueddependenceontraditionalfuels,notjustbyhouseholdsthatdonotuseLPG,butalsobyalargenumberofhouseholdsthatusethemtosupplementtheirLPGconsumption.

IndiahasauniversalsubsidyprovisionondomesticconsumptionofLPG,whichisnot‘means-tested’.Currently,everydomesticLPGconnection,irrespectiveofitseconomicorsocialstatus,isentitledto12subsidizedcylinders(of14.2kgeach)perannum,andanyconsumptionbeyondthathastobepurchasedatunsubsidisedprices.45PriortoSeptember2012,therewasnocapontheconsumptionofsubsidizedLPGcylinders.

In2013-14,theoveralllevelofsubsidyprovidedbythegovernmentfordomesticLPGconsumerswasastaggeringINR48,362crore(USD$7.9bn)46.CEEWanalysissuggeststhatifconnectiontargetsundertheOilSectorVision-2015aremet(i.e.,LPGcoverageto75%populationby2015),ifaverageconsumptionremainsatlevelsthatarecurrentlyseen,andifthereisnochangeinthecapofsubsidizedcylindersavailabletoallhouseholds,thesubsidybillonLPGislikelytoincreaseby70percentby2015andwouldamounttonearly5.7percentoftheestimatednon-planexpenditureofthegovernmentfortheyear2014-15.

Has LPG subsidy achieved its objectives?

Thesimple(andobvious)rationaleforthecontinuedsubsidyonhouseholdLPGconsumptionhasbeentoinsulateLPGconsumersfromdomesticinflationandinternationalpricevolatilityassociatedwithpetroleumproducts.Ananalysisofcookingfuelsusedinhouseholdsacrossthecountrywascarriedoutusinghouseholdexpendituredatafromthe68th RoundoftheNationalSampleSurvey.Theoutcomesofthestudysuggestthatthecurrentsubsidymechanismhasclearlynotachieveditsintendedobjectives.Thefollowingarefourkeyfindingsthatresultfromouranalysis:

1. Therichest30%ofIndianhouseholdsreceivemorethan50%oftotalsubsidyexpenditure.Inaddition, thereisalargerural-urbandivideintheconsumptionofLPGandhencetheaggregatedshareofsubsidy received.Nearlytwo-thirdsofthedistributorsandLPGconsumersareintheurbanareas.2. Thecurrentcap(of12cylinders)issetatalevelwellbeyondtheaverageconsumptionofhouseholds (estimatedatapproximately7cylinders)andsubsidiseswastefulconsumption,leavingasignificant scope of diversion to unintended uses and users.3. DespitetheLPGsubsidy,thelowerincomegroupsspendadisproportionatelyhighershareoftheir monthlyexpendituresonprocuringcookingenergy.4. TheLPGsubsidyalongwiththecurrentdistributionarrangementshasnotsucceededinfacilitatinga transitionfromtraditionalfuelstoLPG,especiallyforthepoor.Traditionalfuelssuchasfirewood, animaldung,agriculturalwastes,etc.continuetobewidelyusedandcontributetothemajorityof the energy needs of the poor. The negative externalities associated with the consumption of these fuels also fall squarely on these poor households and further add to their economic burden.

LPGsubsidyinitscurrentformisintendedtomakethefuelmoreaffordable.However,theinterventionstoimprovetheadoptionofLPGinruralhouseholds(andtheurbanpoor)mustalsofocusonimprovingphysicalaccesstoit,i.e.,toincrease the penetration and availability of fuel in all areas and to raise awareness about the health and local environmental benefitsoftransitioningtotheuseofLPG.Inrecentyears,schemessuchtheRajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVYlaunchedin2009)haveattemptedtoincreasetheLPGpenetrationinruralareasthroughsmallsizeandlowcost


distributionmodels.TheschemehasmetwithmoderatesuccessbutmorerobustmethodsareneededtomakeuniversalLPGaccessareality. Withregardtoawarenessgeneration,therehavebeensporadiceffortsinspecificpocketsbyentitiessuchasHindustanPetroleumtoraiseawarenessanddemonstratethesuperiorityofLPGasacookingfuelcomparedtootheroptions.TheRasoi Gharscheme,whichprovidesforcommunitykitchensusingLPG,andtheSuraksha Sanchetna Abhiyan information campaignonLPGconservationandbenefits,haveshownpositivebenefitsaccordingtothestudiesthatevaluatedthem.

The Road Ahead

BasedontheanalysisofthesubsidydisbursalmechanismandthecurrentreachofLPGdistribution,itissuggestedthatall three elements of affordability, availability and awareness be focused on simultaneously. This will effectively achieve the statedobjectivesofLPGsubsidyinthecountry.Ourkeyrecommendationstothiseffectarethreefold:

1. Rationalizationofsubsidiesbyreducingthesubsidycaplimit,andsubsequentintroductionof differentiated subsidy provision. 2. ImprovementofLPGavailabilityinruralareasthroughinnovativeapproachessuchasextensioncounters, mini-distributionagencies,andruralsupplychains.3. AwarenessgenerationamongtheruralpopulationabouthealthandassociatedbenefitsofLPG consumptionoverinefficientusageoftraditionsolidfuels,tofacilitateitsgreateradoptionandusage.

Evidence from literature and our analysis of household consumption patterns suggest that it is desirable to limit the proportionofhouseholdexpenditureoncookingenergyconsumptionto6percent(anormativeaffordabilitylimit).Thepooresthouseholdsinthecountrytodayspendcloseto8percentoftheirexpenditureoncookingenergywhiletherichestspend as little as 2 per cent. In order to reduce this disparity in outlay for various economic strata it is recommended that the top 10-15 per cent of Indian population (by income) can be excluded from the subsidy provision for domestic LPG. For the bottom ~30 per cent of the population, which roughly translates to the Below Poverty Line (BPL) population of the country, the subsidized price of domestic LPG must be lowered in order to enable higher levels of adoption. The population thatdoesnotbelongtoeithergroupwillwitnessamarginalincreaseinthepriceofLPG(basedonthecurrentpriceofcrude).

Thewealthyhouseholdsthataretobeexcludedfromsubsidyprovisionunderthisproposalcanbeidentifiedthroughdiversemetricssuchasincometaxstatus,ownershipoffour-wheelerpassengervehicles,ownershipofluxuryassets(SECCdatabase)orviaKnowYourCustomer(KYC)exercisetobeconductedbyOMCs.Itisalsolikelythattherewillbethe least resistance from this group to any proposals to decrease or withdraw subsidies.

ArecentannouncementbythegovernmenthasindicatedamovetofixthesubsidyonofferpercylinderasopposedtotheprevailingpracticeoffixingthepriceofsubsidizedLPG(CCEA,2014).Thismoveisaimedatcontainingthesubsidyoutflowwhenglobaloilpricesreboundfromthecurrentlows.Whileitisastrategicmovetoimplementsuchamechanismwhenoilpricesarelowandmorepalatablefortheaverageconsumer,thisdoesnotaddressanyoftheissuesthathavebeenraisedwithregardtotheinequityindisbursalofsubsidy.Itismerelyashort-termfixforachronicailment,whichwillresult in an adverse impact on the affordability for poor households once global crude prices rise.

InordertoimproveavailabilityandtoincreasethereachofLPG,novelmechanismsliketheuseofself-helpgroups(SHGs)and existing rural supply chain and extension counters of distribution agencies can be used for delivery purposes. The requisitetraining,informationprovisionandinitialexposuretothecommodity(andthestoves)areimperativetoincreaseadoptionandusage,especiallyamongruralhouseholds.

TheunderlyingobjectiveofequitableLPGprovisionistoprovidecleanandaffordablecookingenergytoall.Onlywhenthethreedimensions-affordability,availabilityandawareness-areeffectivelyaddressedcanIndiaachieveequitableLPGprovision(globalcrudesupplyandpricesconstraintsnotwithstanding).

CCEA.(2014).Modified direct benefit transfer scheme to be relaunched in the country.RetrievedOctober30,2014,from http://pib.nic.in/newsite/erelease.aspx?relid=110694

CSO.(2013).Energy Statistics 2013.Retrievedfrommospi.nic.in/mospi_new/upload/Energy_Statistics_2013.pdf

MoPNG.(2009).OilsectorVision2015for“Consumer Satisfaction and Beyond.”RetrievedJuly16,2014,from http://pib.nic.in/newsite/erelease.aspx?relid=49446

MoPNG.(2013).LPG Cooking Fuel: A Quantum Leap in Service to the Customers.PIB.Retrievedfrom http://pib.nic.in/newsite/efeatures.aspx?relid=98430

MoPNG.(2014).Fiscal subsidy on domestic LPG.RetrievedOctober07,2014,from http://pib.nic.in/newsite/PrintRelease.aspx?relid=107625

Sethi,S.P.(2010).AnalysingtheParikhCommitteeReportonPricingofPetroleumProducts.Economic and Political Weekly, xlv(13).Retrievedfromsanhati.com/wp-content/uploads/2010/07/surya_sethi_epw2010.pdf

References

Direct Transfer of Subsidies: Case of pilot project in Kotkasim, Alwarii

AnjaliRamakrishnan,MadhuraJoshiandAnmolSoni(TERI)

Over30percentofthehouseholdsinIndiahavenoaccesstomodernlightingfuel.Withelectrificationyettoreacheveryvillage,keroseneisakeysourceoflightingforthesehouseholds.Incertaincases,keroseneisalsousedasacookingfuel,eitherforignitingbiomassorinkerosenestoves.Tohelpmeetlightingdemandinpoorcommunities,keroseneissuppliedatsubsidizedratesthroughthegovernment-sponsoredPublicDistributionSystem(PDS).Thereisaneedtoenhanceefficiencyinthedeliverymechanismtoensurethatthesubsidiesreachtheirintendedpopulationandtoreduceleakages.Thereduceddemandwillalsohelpdecreasethesubsidyburdenonthegovernmentandonoilmarketingcompanies(OMCs).

ThecentralgovernmentprovideskerosenetostategovernmentsbasedontheLPGandpipednaturalgascoverage,thepercapitaallocationofkeroseneinthestate,andthequantityliftedbytherespectivestateinthepreviousyear.OMCsthensupplytheallocatedkerosenetostatedistributionsystemsbymakingitavailableatfairpriceshops(FPS)andoildepots.Broadly,itistheresponsibilityofstatestoensurethatsubsidizedkerosenereachesitsintendedfinalconsumers.Theunder-recoveryonthesaleofkerosenecurrentlystandsatRs.34.80perlitre,withtotalunder-recoveriesofRs.31,256croreinFY2013-14.

WhilethePDSsystemaimstoensurekeroseneaccessibilityataffordablerates,thewidemarginbetweenthemarketpriceandthesubsidizedretailsellingpriceincentivizedthediversionofkerosenetotheblackmarket.Therehavebeen,therefore,long-standingdemandsforasystemthatbettercontrolsdeliveryofkerosenesubsidies:adirectcashtransferhasbeenmootedasoneofthepossibleoptionsbypolicy-makers,thegovernment,anddevelopmentagencies.

InDecember2011,theGovernmentofRajasthan,withsupportfromthecentralgovernment,launchedapilotschemeinKotkasim,Alwar,RajasthantotestasystemofdirecttransferstothebankaccountsofrationcardholdersasameansofdistributingPDSkerosenesubsidies.Asperthescheme,themonthlyallocationof3litrestoeveryrationcardholderissuppliedatamarketrate(whichequalsthedepotrateplusstate-leveltaxes).Thesubsidyamount(asdeterminedbythestateauthorities)isthentransferredtothebankaccountsoftherationcardholderonaquarterlyormonthlybasis.Thisrequireseverybeneficiarytohaveanoperatingbankaccountwithanyofthedesignatedbanksunderthescheme. TheEnergyandResourcesInstitute(TERI),supportedbytheInternationalInstituteforSustainableDevelopment(IISD),undertookastudytoassessandevaluatetheefficacyofthepilotprojectinKotkasim.Thestudyfocusedonwhetherthehouseholdshadaccesstothesubsidyandexaminedeaseofaccess,theimpactonhouseholdexpenditure,andachievementofpolicyobjectives.Itconcludedwithananalysisoftheimplicationsthatemergedfromthepilotforthekerosenesubsidysystemandprovidedrecommendationsforimplementationofsuchschemesin the future.

Theprocessofevaluationinvolvedmeetingswithschemeparticipants,includingdistrictofficials,bankofficialsandfairpriceshop(FPS)dealers.Basedonkeyinterviewsandpre-fieldworkactivities(multiplebriefvisitstovillagestotestawarenessaboutthescheme),abeneficiaryquestionnairewasdesignedandadministeredin160householdsinfourvillages.Alongsidetheprimarysurvey,theresearchteamalsoconductedfocusgroupdiscussionstogetabetter understanding of the issues faced by the households.

Theevaluationshowsthatsincethecommencementofthescheme,thesaleofkeroseneattheFPSsfortheKotkasimblockfelldrastically(from82kilolitres(Kl)inNovember2011to54KlinFebruary2012)overtheperiodofthescheme.Apartofthisdeclinecanbeassuredlyattributedtothescheme’ssuccessincurbingleakageofkerosenetotheblackmarket.However,itisimportanttopointoutthehighlevelofelectricityaccessintheareaalsosuggestedarelativelyhighpriceelasticityofkeroseneasasourceofenergy,asaresultofaccessiblealternativestokeroseneconsumption.

Whilethetotalusageofkerosenedeclined,morecriticalissueswerefacedinthehouseholds’accesstoandunderstandingofthescheme.Thestudyshowedthatthehighupfrontcostofkerosene,pooraccesstobankingfacilities,andtheoveralluncertaintyassociatedwiththetimelytransferofsubsidyalsocontributedtohouseholdsreducingtheirkeroseneconsumption.Thedistancefromthebank,thetimerequiredthere,theneedformultipletrips(whenthetransferofsubsidywasdelayed),andthelackofunderstandingofthebankingsystemandtheroleofbankscameacrossassomeofthebiggestchallengesofimplementation.Thelackofagrievanceredressmechanismwasoneofthemissinglinksrequiredtohelpsolvetheseissues.Ontheotherhand,thelargenumberofzero-balanceno-frillsaccountsopenedfortheschemeledtoanincreasedburdenforthesmall-capacitybankbranches.Fortheviabilityofanyelectronicpaymentscheme,increasingthereachofthebankingsystemswouldbecrucial. TheimpactoftheschemeontheFPSdealers-thecrucialmediumforthesuccessofthescheme,wasnotablyadverse.Thereductioninsalesofkerosenedrasticallyreducedtheirearningfromthetotalcommissiononkerosene,


whichsignificantlyaffectedtheirattitudestowardsimplementingthescheme.Untilrecently,theircommissiononthesaleofkeroseneinRajasthanwasRs.0.9/litre,insufficienttomeettheircosts.ThiswaslaterraisedtoRs.2.7/litre.Sincethesedealersendupbeingthefirstpointofcontactandinformationforthehouseholds,itisimportantthattheir concerns are also addressed.

Poorunderstandingofthescheme’sfunctionalityandlackofclarityontheobjectivesoftheschemewasapparentinthehouseholds,demonstratingtheneedforbettercommunicationandinformationtobeprovidedtobuildpublicawareness.

Recommendations

FortheschemetosuccessfullymeetitsgoalsinAlwarandelsewhere,thefollowingadjustmentsandimprovementswouldlikelyhavetobemade:

1. Adequate planning time and preparation of a structured system for information dissemination must be assured well before launch of the scheme.2. Theopeningofbankaccountsforallbeneficiaryhouseholdsshouldtakeplacebeforelaunchofthe scheme. 3. Accesstobankingfacilitiesmustbeextendedinvillagestoavoidmultipletripstothebankand additional time costs borne by the households in accessing the subsidy. A possible adoption of theBankingCorrespondent(BC)Modelmightbeconsidered.4. Incentives(highercommissions,accesstoinformation)shouldbeprovidedforFPSdealersto productivelyparticipateasacentralfocalpointintheroll-outandmanagementofcashtransferschemes forkeroseneinordertoensuretheiroptimalpenetration.Involvinglocalstakeholdersinthe implementationprocesscansignificantlyboostawarenessamonghouseholdsbygivingthema local source of reliable information. 5. Digitizationoffuelpurchases(recordedthroughthehouseholdrationcard)anddealertransactionsover timecanensurepermanentandtamper-proofmaintenanceofrecords. Reducing“leakages”inthecurrentpublicdistributionsystemiscrucial;however,itisequallyimportant to ensure that the new system does not bring about additional challenges and welfare impacts for the householdsthatendupleavingthem,quiteliterally,inthedark.

i This calculation would hold assuming that multiple connections within the same household do not exist.

iiThisarticleisbasedontheTERI(2014).Evaluation of the Pilot Project on Direct Transfer of Kerosene Subsidies in Kotkasim, Alwar.Geneva:InternationalInstituteforSustainableDevelopment.Availableat:http://www.iisd.org/gsi/sites/default/files/ffs_india_kerosene_alwar_final.pdf

Notes

The Last Word

The Unstable Political Economy of Natural Gas Pricing in IndiaSubhomoyBhattacharjee(IndianExpress)

TheModiadministrationhasdecidedtoraiseIndia’snaturalgasprices,takingeffectNovember1,2014.This was surprising both for the comprehensive nature of the decision and for the fact that the government waswillingtocourtsignificantpoliticalrisksindoingso.Inonemove,thegovernmenthasremovedimportparityingaswhichwasacceleratingcostpressuresfordownstreamgasconsumers,despitetheattractionsthatsuchprice-settingmechanismsofferedforinvestmentsinexploration.ThedecisionbythecabinetcommitteeonpoliticalaffairscamebeforeareviseddeadlinesetforNovember15,2014expiredandwaspartofaseriesofquickstepstheModiadministrationtooktoreformtheenergysectorinrecentdays(asdiscussedthroughoutthispaper). ItwasinthecardsthatthegovernmentwouldrevisedieselpricesafteritwasfinishedwithtwocriticalstateassemblyelectionsonOctober15,2014.ButtherevisioningaspriceswasfranklymoredifficultsincetheUPAgovernment(andnoweventheBJPgovernment)wasbuildingupanalternatesubsidyonnaturalgasusagetodeflectpoliticalcriticismonphasingoutdieselsubsidiesandeventuallythoseonLPGandkerosene.ThepricingofnaturalgasisconsequentlyapoliticaleconomydecisioninIndia,carryingthesamebaggageasthatforfuelproducts.Ithasbecomemorecomplicated,astheIndianSupremeCourtinSeptemberhascancelledallallocationsofcoalblockssince1993,whichcouldaffectdomesticcoalprices.As60percentofIndia’spowerstationsusecoal,thepressuretokeepthepriceofnaturalgas(whichpowers9percentofIndia’spowerstations)flatincreased.

ThesearedevelopmentswhichwerenotevenfactoredinaskeyenergysectorfinancingorsubsidyrisksbyanalystswhenfinanceministerArunJaitleywrotehisbudgetinJulythisyear.Reportsdiscussedtwootherrisks.Thefirstwasthatthemonsoonscouldfailandengenderarunawaydemandfordieseltorunthegeneratorsetsforirrigatingrain-dependentcrops.TheotherwasthattroubleintheMiddleEastcouldpushcrudepricesupsignificantly.Intheend,neitherofthesecametofruition.ReserveBankofIndiaGovernorRaghuramRajanpointedtotheseencouragingdevelopmentsinrecommendingthatthegovernment eliminate the administered pricing of diesel.

Thegovernmenthasnowtakenthreedecisionsonnaturalgas.Ithasadoptedanewformulatodecideonthe appropriate price for gas produced in India. It has made this price applicable for all private and state ownedgasextractioncompaniesreducingcomplexityandfinallyannouncedanincentiveschemeforinvestmentsindeepseaorinthedifficultNorthEastregion.

ThenewpriceofUS$5.6/millionBritishthermalunits(mmBTU)—despitebeingfarlowerthanprivateandpublicsectoroilcompanieshadwanted—isnevertheless33%higherthanpreviously.IthasalsomovedIndiamuchclosertomarket-basedpricingofnaturalgasandcappedtheriskofcreatingadditionalsubsidiesinthissector,complementingthereformindieselmarkets.Forinvestmentsindeepseaacreagewheremostdomesticgasreservesarelocated,thegovernmentwillofferanadditionalpremium.ButinsteadofmovingtoapriceofUS$8.4/mmBTU-aswaslikelytohaveoccurredundertheoriginalRangarajanpricingformula-thatcouldhavesignificantlyincreasedthepriceofpipedcookinggas,powerandfertilizer,thisisapragmaticcompromise.


Butthesubsidyproblemisnotover.Naturalgasnowaccountsfor7%ofIndia’stotalenergyconsumption,makingitthethird-mostconsumedfuelaftercoalandpetroleum.Thestrikingaspectofthisrankingisthespeedatwhichithasmovedtothethirdposition,andcloseto30percentofitisimported.Indiabeganto import natural gas from 2004 as an obvious substitute for costlier imported naptha and also for coal whose domestic supply was far below demand. International prices of natural gas were soft and expected toremainso.TheimportstoppedupdomesticproductionbyIndiancompanieslikeONGC,whichwasatthatstageflaringgas.Atthattime,thegovernmentencourageddownstreamcompaniestoswitchtonaturalgasasfeedstockbackedbycheapimportsandbyreportsthatRILhaddiscoveredsubstantialgas deposits.

Anestimateofthescaleofimportgrowthistheprojectedexpansionofportre-gasificationplans.Thecurrentnationalcapacityof936billioncubicfeet(Bcf)(asperU.S.governmentEnergyInformationAdministration[EIA]numbers)willalmostdoublethisdecade.TheexpansionatDahejwillraiseitscapacityfrom480to720Bcfby2016.Indiaisnowtheworld’sfourth-largestimporterofnaturalgas.Domesticproductionwillnotbeanywhereclosetomakingupthisimportdeficitintheshorttomediumterms,especiallyasthesupplyresponsetohigherpriceswilltaketime.TheearliestestimateforRIL-BPconsortiumtorampupcapacityto767Bcfis2020,forexample.

Goingahead,domesticpriceswouldberevisedeverysixmonths.ButwithrisingdemandIndiahastorelyonAsian(andevencostlierAustralian)gas.Despitetheremovalofimportparitypricingfromtherecentpricerevision,thegulfinpricebetweendomesticandimportedpricesstillexist.Whowillpaythedifferencebetweenhigherimportpricesandthepriceofdomesticsupply?Willitbepassedontotheconsumers,andthestrategicallyandsociallyimportantpowerandfertilizersectorsinparticular?Thisissomethingwhichthecurrentreformshavenotbeenmadeclear,andwhichremainsadifficultquestionforgovernment to answer.

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About IISDTheInternationalInstituteforSustainableDevelopment(IISD)contributestosustainabledevelopment by advancing policy recommendations on international trade and investment,economicpolicy,climatechangeandenergy,andmanagementofnaturalandsocialcapital,aswellastheenablingroleofcommunicationtechnologiesintheseareas.Wereportoninternationalnegotiationsanddisseminateknowledgegainedthroughcollaborativeprojects,resultinginmorerigorousresearch,capacitybuildingindevelopingcountries,betternetworksspanningtheNorthandtheSouth,andbetterglobalconnectionsamongresearchers,practitioners,citizensandpolicy-makers.

IISD’svisionisbetterlivingforall—sustainably;itsmissionistochampioninnovation,enablingsocietiestolivesustainably.IISDisregisteredasacharitableorganizationinCanadaandhas501(c)(3)statusintheUnitedStates.IISDreceivescoreoperatingsupportfromtheGovernmentofCanada,providedthroughtheCanadianInternationalDevelopmentAgency(CIDA),theInternationalDevelopmentResearchCentre(IDRC),andfromtheProvinceofManitoba.TheInstitutereceivesprojectfundingfromnumerousgovernmentsinsideandoutsideCanada,UnitedNationsagencies,foundations and the private sector.

About GSIGSIisaninitiativeoftheInternationalInstituteforSustainableDevelopment(IISD).GSIputsaspotlightonsubsidies—transfersofpublicmoneytoprivateinterests—and how they impact efforts to put the world economy on a path toward sustainable development.Incooperationwithagrowinginternationalnetworkofresearchandmediapartners,GSIseekstolaybarejustwhatgoodorharmpublicsubsidiesaredoing;toencouragepublicdebateandawarenessoftheoptionsthatareavailableforreform;andtoprovidepolicy-makerswiththetoolstheyneedtosecuresustainableoutcomes for our societies and our planet.

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