Cooking Gas Cheaper For Poor, Remove Subsidy For Rich: Study
By distributing 73 million connections (as on July 14, 2019), the Ujjwala scheme has met 91.25% of its target.
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The subsidy on liquefied petroleum gas (cooking gas) cylinders for India's newly-connected 73 million poor households should be increased enough to limit the cost of a cylinder to 4 percent of a household’s monthly expenditure, according to a study.
The subsidy should only be provided to poor households, and the wealthy should be removed from the beneficiaries list, according to the June 15, 2019, policy brief titled “Ujjwala 2.0” by Collaborative Clean Air Policy Centre (CCAPC), a multi-organisational initiative.
By distributing 73 million connections (as on July 14, 2019), the Ujjwala scheme has met 91.25 percent of its target of 80 million connections to poor households by 2020. This is a 35-percentage-point rise since 2014.
However, despite the soaring consumer numbers, cooking gas consumption rose by just 0.8 percent over two years to 2017, and the number of customers increased by 6 percent, IndiaSpend reported on 22 April, 2019.
Beneficiaries under the Ujjwala scheme have only bought 3.4 refills per capita annually, according to government data. For these households to completely switch to cooking gas, at least nine cylinders are required per year, according to the CCAPC brief.
Ujjwala beneficiaries have not switched completely to cooking gas because the refills are expensive. Around 85 percent of Ujjwala beneficiaries in rural Bihar, Rajasthan, Uttar Pradesh and Madhya Pradesh – where two-fifths of India’s rural population lives – still use solid fuels, IndiaSpend reported on 30 April, 2019.
Strengthening the Ujjwala scheme is also important to mitigate the health burden of India.
Burning firewood, dung and agricultural residue for cooking and other household uses accounts for 25-30 percent of exposure to outdoor particulate matter (PM) pollution in the country.
Each year, around 480,000 Indians die prematurely due to direct exposure to household air pollution, and another 270,000 succumb to indirect exposure outdoors, the policy brief stated.
Using cooking gas can help prevent such deaths, as well as reduce government expenditure on treating ailments that result from exposure to biomass fumes.
With each cooking gas cylinder distributed, the government can save between Rs 3,800 and Rs 18,000 on health expenditure. When cooking gas usage mitigates the household biomass burning completely, 58 percent of the country’s 597 districts will breathe safer air, the brief said.
Budget for Cooking Gas Subsidies Grew by 63% in 2019-20
The initial goal of the Ujjwala scheme launched in 2016 was to target 50 million poor households, of 87.3 million identified by the Socio Economic and Caste Census 2011 (SECC).
In February 2018, this target was revised to target most of the 80 million poor households by 2020. The scheme was also expanded to cover all scheduled caste/scheduled tribe households, beneficiaries of Pradhan Mantri Awas Yojana (Gramin) (PMAYG), Antyoday Anna Yojana (AAY), forest dwellers, most backward classes (MBC), tea and ex-tea garden tribes, people residing on islands, etc. in addition to the SECC list.
The allocation for cooking gas connection to poor households fell 15%, while the allocation for direct benefit transfer (DBT) is up by 79%.
Increase Cooking Gas Subsidy for Poor Households
Under the Ujjwala scheme, the government gives women from below-poverty-line (BPL) households their first cooking gas connection. The connection includes a cylinder, regulator and connecting tube.
The government pays for the upfront cost of the connection, around Rs 1,600, to the cooking gas agency concerned.
It is repaid by the households later as monthly installments that come from the Rs 200-Rs 300 subsidy provided for refills.
However, here is the catch: until the amount of Rs 1,600 is recovered by the gas agencies, these poor households do not get the per-cylinder subsidy credited through DBT in their bank accounts.
This is unaffordable for the poor households, as it is up to 25% of their monthly family income, IndiaSpend found in its April 2019 ground reports from Rajasthan, Maharashtra and West Bengal, which can be read here and here.
Ujjwala beneficiaries having to pay the market rate for refills is a “structural” flaw in the scheme’s design, and a key reason why poor families are unable to sustain their cylinder use, IndiaSpend reported, citing a 2018 article from the Economic & Political Weekly.
This also means that poor households under Ujjwala, for the period of loan repayment, pay more for refills than richer households.
Starting from April 2018, the government, however, is trying to bridge this gap by allowing households to defer their loan repayment upto six refills or one year.
Even after loan repayment, a poor household will have to pay the upfront cost of the refill cylinder first and the subsidy gets credited to their bank accounts later, due to the design flaw.
“Therefore, when non-subsidised cooking gas price is high, the poor household finds it difficult to pay the full market price at the time of purchase and gets demotivated to use cooking gas even though the government subsidy is deposited quickly in the consumers’ bank account,” said the policy brief.
Therefore, the amount of subsidy should be based on the household’s willingness to spend for cooking gas--roughly 4% of a poor household’s monthly income, said the paper quoting a 2016 survey by CRISIL, a market analysis company.
For example, in March 2019, when cooking gas rates for a 14.3 kg cylinder were Rs 701, the central government provided a Rs 206 subsidy to get the subsidised rate of a cylinder to Rs 495. If this subsidised rate comes down to Rs 350, poor households would more likely switch to cooking gas as a primary cooking fuel, said the brief.
Will Limiting the Cooking Gas Subsidy Only to Poor Houses Help?
The survey quoted in the policy brief (see the table below) also shows that the poorest two-quintile classes require cooking gas prices to be lower than the present subsidised price of Rs 495 per kg to keep their cooking gas costs within 4% of their overall monthly expenditure. However, for the richest quintile, the same calculation suggests that these households do not require subsidies.
The table, as per the brief, also shows:
- With respect to monthly income, the percentage expenditure on cooking gas increases as one moves from the richest quintile to the poorest quintile.
- The price of a subsidised cooking gas cylinder for households in the top three quintile classes is lower than the price these households are willing to pay to use cooking gas. Therefore, even if the subsidised price for these households is increased, they will likely continue buying cooking gas.
- On the other hand, the subsidised price for the bottom two quintiles, with the most number of unconnected households, is higher than the price these households may be willing to pay to purchase cooking gas. These households are unable to pay for cooking gas, and will further shift away from cooking gas if the price increases.
Hence, the provision of universal subsidy should be scrapped as it reduces the subsidy rate, because the overall amount available for subsidy is shared across a large number of beneficiaries. Universal subsidy is also “regressive” as it makes cooking gas “unaffordable for the poor, while the benefits accrue to the relatively wealthy”, said the brief.
For better targeting of the subsidy, the government has initiated steps such as the “Give It Up” campaign in 2015, which resulted in more than 10 million middle-class households surrendering their subsidies.
The government also excluded from cooking gas subsidy those who earn Rs 10 lakh or more per annum. These steps, however, “are not sufficient to focus the subsidies on the poor entirely” because the income threshold is fixed so high that most cooking gas consumers are still entitled to receive the subsidy, as per the brief.
Therefore, Ujjwala should have a two-tier, differential pricing for households: a lower price (or a higher subsidy) for the poor identified from the SECC list, and a higher price (lesser or no subsidy) for other consumers, recommends the brief.
For example: cooking gas subsidy on nine cylinders, at Rs 350 per cylinder (as recommended above) to 87.3 million SECC households will put a Rs 27,500 crore ($4 billion) financial burden on the government, as per the brief.
A criticism of differential pricing in the market is the opportunity for diversion of lower-priced cooking gas to the non-subsidised commercial market, the brief said, adding that the DBT scheme will ensure against any subsidy leakage.
Experts, however, suggest that removing wealthier families from the cooking gas subsidy ambit could prove futile. “Given such wide solid fuel use even among richer households, it seems that increasing the price of a refill for them would be counterproductive,” said Ashish Gupta, research fellow at the Research Institute for Compassionate Economics (RICE), a non-profit research organisation.
Cost and affordability or poverty is certainly important, but there are other important factors behind people choosing biomass over cooking gas including gender inequality (women do the cooking with solid fuels), and beliefs regarding the ease, taste and health impacts of cooking with solid fuels versus cooking gas (people think chulha food is tastier and healthier), said an April 2019 RICE study that Gupta co-authored.
Most rural households can gather free solid fuels--firewood, dung and agricultural residue--in their neighbourhood, and an cooking gas refill is considered an expensive alternative. Even in the richest rural asset decile, no more than 40% of households used cooking gas exclusively, as per the RICE study. This calls for generating awareness of the harms of burning solid fuels and encouraging men to cook, said Gupta.
Health Gains Offset the Increased Subsidy Burden
The government should not see the potentially increased subsidies on cooking gas for the poor as a burden because it has substantial health benefits, according to the CCAPC brief.
Using these numbers, the brief calculated that even by the most conservative estimates, the health value of a single cooking gas cylinder can vary between Rs 3,800 and Rs 18,000, said the brief, which is “far greater” than the Rs 350 per cylinder subsidy. “Therefore, the subsidy to poor households should be considered as a social investment,” it added.
Now, the question is how much effect would mitigating household biomass burning have on air pollution?
If emissions of PM 2.5--inhalable particles 30 times finer than a human hair that can enter the bloodstream and cause illness--from all household sources are mitigated, 58% of the 597 districts of the country will meet the national safe air standard, an increase from 41% in 2015.
Another 187 million people will breathe safe air, according to this April 2019 paperpublished in Proceedings of the National Academy of Sciences (PNAS), a US-based peer-reviewed journal.
(This was first published on IndiaSpend and has been republished with permission.)
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