INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN Shri Param Hans Education & Research Foundation Trust

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1 INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN A REFEREED JOURNAL OF Shri Param Hans Education & Research Foundation Trust Published by isara

2 LPG Subsidies Reforms in India Swati Chhabra Asst. Prof. PMN College Rajpura Abstract: In principle, any measure that keeps prices for energy consumers below market levels or for energy producers above market levels or that reduces costs for consumers or producers may be considered a subsidy. This study aims to take a comprehensive look at a little discussed problem that makes policy makers more thoughtful- LPG subsidies. This is a remarkably important issue because the presence of such subsidies would appear to be damaging on two fronts not only is a market for LPG is being distorted such that too much of the LPG may be consumed, but subsidy on LPG is regressive in nature. On the other side of the coin, this means that there is a potential double dividend from the removal of these subsidies. Economies may see an improved allocation of resources, and action to combat increased government cost could be achieved in one fell swoop. In other words, LPG subsidy elimination could be a socio economic mitigation policy that could be achieved at negative cost, and is therefore particularly worthy of investigation. As with all such negative-cost policy options, however, the fact that they have not yet been undertaken fully despite the win-win characteristics suggests that there are hidden costs or some other barrier to their uptake. Keywords: LPG subsidies, Fiscal Revenue, Ujjawala Yojna. Introduction: Subsidies in India account for a significant part of the government s expenditure. The implicit cost of subsidies has a considerable pressure on strained fiscal resources as well as they are also failing on the anvil of equity and efficiency in providing these subsidies. In terms of their economic effects, subsidies have been subjected to an intense debate in India in recent years. Subsidies on agriculture have distortion effects on the cropping pattern, subsidies on domestic LPG has resulted in the misuse of LPG cylinders such as for water heating or commercial usage of cylinders. Review of Literature: World energy outlook published a report on China and India insights in According to their survey Kerosene and LPG are heavily subsidized in India, with the intended aim of shifting fuel consumption patterns away from biomass to cleaner, more efficient fuels. Page 119

3 Since it is mostly poor households that rely on biomass and live in rural areas, the subsidies were designed to support for energy access to the poor. But this objective has not been met. The Energy and Resource Institute in India estimates that 40% of the subsidies for LPG and kerosene benefits the richest 7% of the population. These subsidies are ineffective in reaching to the poor and improving welfare of the poor. In 1998, India launched a Deepam scheme as well for the poor but subsidies benefit did not reach to the poor. In this scheme, poor household were given INR 1000 for LPG connection with the that 9-10 refills of the cylinders will be done in a year but only 2-3 refills were there because there was subsidy on connection was there not on the refills. According to this survey, government should come with subsidy debit card for the real beneficiaries with a certain monthly expense limit on energy so that poor people can afford LPG with no expenses and they can shift from traditional fuels to cleaner and affordable fuels of energy. Ministry of finance in May 2014 published in a report on Direct Benefit Transfer on LPG that the subsidy burden during was a whopping Rs billion, of which the LPG subsidy alone was Rs. 464 billion. The fact that such a huge amount of subsidy is being provided to consumers imposing an unimaginable burden on the state exchequer, must be a matter of concern of every citizen in India. As this fact has not been communicated effectively to the consumers, there has been a growing sense of entitlement on part of the consumer to the subsidy. Apart from the lack of awareness of the huge subsidy burden, the pricing of such products below the market price has also led to diversion of subsidized LPG to commercial purposes, which unnecessarily adds to the subsidy burden of the exchequer. LPG subsidy burden as can be seen from the table below: Year Subsidy (Rs. Crore) As the subsidy on an LPG cylinder may be as high as 100%, there is a strong incentive for pilferage and diversion. This leads to diversion of subsidized cylinder for commercial purposes. There is only one way to prevent this diversion to move LPG in the supply chain at one market price so that the incentive for diversion is eliminated. This is the backdrop of the Direct Benefit Transfer for LPG scheme. Honorable Prime Minister Narendra Modi on 27 March 2015 in Urja Sangam held in New Delhi appealed to the well off people to give up subsidized cooking gas, and expressed his government's resolve to reduce dependence on energy imports by 10 per cent by Page 120

Source: ENS Economic bureau, 6/12/2015 Sharing oil companies' plans to increase piped cooking gas connection to one crore households from 27 lakh currently in the next four years, Mr Modi said the

4 Source: ENS Economic bureau, 6/12/2015 Sharing oil companies' plans to increase piped cooking gas connection to one crore households from 27 lakh currently in the next four years, Mr Modi said the decision to surrender LPG subsidy by 2.8 lakh consumers would result in a savings of Rs.100 crore. According to him if 2.8 lakh people respond positively for surrendering LPG subsidy, it will lead to savings of Rs. 100 crores which can be utilized for welfare of poor people. For curbing the supply of subsidized cylinders NDA government on December 29, 2015 announced that taxpayers above the income INR 10 lakh will not be given subsidy on cylinders. Government decided to provide 12 subsidized cylinders of 14.2 kgs each at while the market price per cylinder was 608. According to central bureau of tax department, there were lakh assesses in India having income more than INR 10 lakh. Initially given up for subsidy was on self declaration basis and more than 52 lakh people opted out of the subsidy plan. Varun Gandhi general secretary of BJP and LOK Sabha MP in a press report in 2015 said that subsidies should be tightly targeted and transparently administered. In his speech, he talked about subsidies on food, fertilizers and LPG. India has set aside Rs 4,55,145 Crore for payment of interest on public debt in 2015, a non-plan expenditure of central government budget These include special securities issued to oil-marketing companies, fertilizers companies, FCI etc. Outlays for subsidies to fertilizers companies comprised Rs 72,968 Crore. The government control of the retail price of LPG and kerosene has led to an additional Rs 30,000 Crore in subsidies. India s energy subsidies have seen significant transformation over the last year, with the government introducing dual pricing for kerosene and making the market-priced kerosene free from government control. The Direct Benefit Transfer (DBT) cash transfer scheme for LPG has successfully enrolled millions of citizens, becoming the largest cash transfer scheme globally. These efforts have already resulted into savings of approximately $2 billion and weeding off approximately 55 million fake users, besides curtailing black market use. However, LPG Page 121

5 and kerosene subsidies have encouraged a flourishing black market. Nominally under the purview of state governments, kerosene is largely disbursed through a corrupt and inefficient public distribution system (PDS). Local politicians are often in cahoots with mafias that adulterate petrol and diesel with cheap kerosene. With the price differential between PDS kerosene and diesel remaining significant, diversions will continue. Research Problem: The concept of LPG subsidies reforms is the biggest subsidy reform. The research intends to focus on understanding the journey of LPG subsidies and their reforms in India. Objectives of the study: 1. To study the concept of LPG subsidies. 2. To study the importance of subsidy reforms. Research Methodology: The study focuses on extensive study of Secondary data collected from various books, National & international Journals, government reports, publications from various websites which focused on various aspects of LPG subsidy reforms. Journey of LPG subsidy reforms: PDS Kerosene & Domestic LPG under Subsidy Scheme 2002 The year wise subsidy on PDS Kerosene & Domestic LPG under Subsidy Scheme 2002 is as under: Year PDS Kerosene Domestic LPG Total * Page 122

6 Source: Petroleum Planning and Analysis Cell Subsidy on PDS Kerosene and Domestic LPG effective is met from the fiscal budget and has been fixed on a specified flat rate basis for each Depot/Bottling Plant based on the difference between the cost price and the issue price per selling unit. The scheme has provided that both the cost price and issue price would be revised by the companies based on the changes in corresponding prices in the international market. However, this mechanism could not be implemented by the companies on account of sharp rise in LPG prices in international markets since 2004 and consequent Government direction to modulate price increases. Page 123

7 Table: 1.2 Period : to ( Figures in Crores) Under recoveries/ DBTL Subsidy on Sale of Sensitive Petroleum Products Year / Petroleum Products Under Recovery on Petrol Under Recovery on Diesel Under Recovery on Domestic LPG (Subsidised)^ ** # Year wise under recoveries on the sale of Sensitive Petroleum Products Source: Petroleum Planning and Analysis Cell # Under recovery on Diesel is only upto 18th October '2014. ^Government has taken decision to restrict the supply of subsidized LPG cylinders to each consumer to 12 cylinders annually DBTL Subsidy on Domestic LPG (Subsidised)^ Page 124

The average subsidy during 2002-03 on PDS Kerosene was Rs.2.45 per liter& on domestic LPG at Rs.67.75 per cylinder. The flat rate subsidy was reduced by 1/3 rd each year during 2003-04 and 2004-05.

8 The average subsidy during on PDS Kerosene was Rs.2.45 per liter& on domestic LPG at Rs per cylinder. The flat rate subsidy was reduced by 1/3 rd each year during and Since then the subsidy rate for Domestic LPG and PDS Kerosene has been maintained at the level (i.e. 1/3 rd of level), i.e. 82 paise per litre for PDS kerosene and Rs.22.58/cylinder for domestic LPG. Figure 1.4: LPG under Recovery (2006/ /14) Total LPG under-recoveries have grown strongly in the previous four years, increasing from Rs. 21,772 crore (USD $3.6bn) in FY to Rs. 46,458 crore (USD $7.6bn) in FY 2013/14. In fiscal year , total LPG subsidies (including both under-recoveries and direct budgetary subsidies) amounted to Rs. 48,378 crore (USD $7.9bn), representing 34% of total fuel subsidies Direct subsidies have declined from a high of Rs. 2,137 (USD $351m) crore in FY to Rs. 1,920 crore (USD $315m) in FY , reflecting a reduction in the total consumption of subsidized LPG by volume. (Figure 1.4) In the financial year ( ), domestic (subsidized) LPG retailed at a fixed price of Rs per 14.2kg cylinder relative to an average total cost of approximately Rs. 936, representing a subsidy of around Rs. 522 per cylinder or 56% of total cost (Figure 1.5). The price for domestic LPG was raised by Rs. 3.5 (from Rs to Rs 414) on 11th December 2013, and therefore average realized price and total subsidy figures differ slightly from those presented (fiscal subsidy was fixed throughout FY 2013/14). Page 125

9 Figure 1.5: Domestic LPG price breakdown (2013/14) Under-recovery represents an average unit under-recovery reported by the MoPNG for FY 2013/14. All prices relate to the IOC in Delhi (the final retail price of domestic LPG varies between states and Union Territories (UT) due to differences in state-levied taxes and other charges. Table: 1.3 Under Recoveries to Oil Companies for Sale of Sensitive Petroleum Products Period: 2016:17 (April to March Under recoveries to Oil Companies for Sale of Sensitive Petroleum Products Year / Petroleum Products Diesel (Retail) # Domestic LPG (Subsidised)^* PDS Kerosene Total April - June (Q1) 0 2,128 1, July - September (Q2) 0 1,576 2, October - December (Q3) 0 2,695 1, Page 126

10 In fiscal year , total fuel subsidy expenditure on diesel, LPG and kerosene fell from the record high of Rs. 163,759 crore (USD $26.9bn) - or 1.74% of GDP - in to Rs. 142,470 crore (USD $23.4bn) (1.36% of GDP). This figure includes under-recoveries for diesel, domestic LPG and PDS kerosene, and direct subsidies for domestic LPG and PDS kerosene. Diesel subsidies, which constituted the single largest component of fuel subsidy expenditure in six of the last eight years (Figure 1.7), decreased to Rs. 62,837 crore (USD $10.3bn) in FY from their record high of Rs. 92,061 crore (USD $15.1bn) in FY As a result of ongoing diesel price reform and an increase in the per household cylinder quota in January 2014, in the last quarter of FY (January-March) LPG under-recoveries exceeded diesel underrecoveries. Diesel under-recoveries continued to fall throughout Q2 FY (July- September), with the OMCs recording net profits on the sale of diesel from mid-september onwards prior to the formal decontrol of diesel prices on 18th October. Fig 1.7: Total Subsidy by Product (2005/ /14) 1.6 Recent Trends in LPG Subsidies: Total LPG under-recoveries have grown strongly in the previous four years, increasing from Rs. 21,772 crore (USD $3.6bn) in FY to Rs. 46,458 crore (USD $7.6bn) in FY 2013/14. Direct subsidies have declined from a high of Rs. 2,137 (USD $351m) crore in FY to Rs. 1,920 crore (USD $315m) in FY (Figure 1.8), reflecting a reduction in the total consumption of subsidized LPG by volume. Page 127

Figure 1.8: LPG direct subsidy (2006/07-2013/14) 1.6.1 DIRECT BENEFIT TRANSFER SCHEME: The direct benefit transfer scheme is an attempt by government to change the mechanism of subsidies.

11 Figure 1.8: LPG direct subsidy (2006/ /14) DIRECT BENEFIT TRANSFER SCHEME: The direct benefit transfer scheme is an attempt by government to change the mechanism of subsidies. Under this scheme, subsidies and scholarships are directly transferred to the bank account. The primary aim of this scheme is to bring transparency and terminate pilferage and delays from distribution of funds. This scheme was initially launched on 1 st January 2013 in 20 districts covering scholarships and social security pension plans. From April 2013, 78 more districts were included in the scheme. Under this scheme, the subsidy on cylinders will directly be credited to Adhaar linked accounts. As soon as, person books his first subsidized cylinder, he gets a subsidy in his other linked account before the delivery. On receiving the first subsidized cylinder, the next will again get credited in the account before the delivery of next cylinder up to the cap of 12 cylinders per year. In September 2012, the government introduced a cap of maximum 6 cylinders at subsidized rate per annum. In January 2013, this quota was increased to 9 per annum. In January 2014, this quota was further increased to 12 cylinders per annum. On November 2014, the scheme of direct benefit transfer was little modified whereby the consumers who have not yet availed the benefits will be able to get cash subsidies in their bank accounts by purchasing the cylinder at market price. In March 2015, Prime Minister Narendra Modi launched Give up LPG subsidy campaign. The aim of this campaign to motivate those LPG users who can afford to consume LPG at market rate should Give Up their subsidy. Up to April 2016, Around 105 lakh households have voluntarily given up their LPG subsidy, Nearly 63 lakh new LPG connections have been released to BPL families in Financial Year linked to Giveback campaign utilizing CSR funds of OMCs. Page 128

12 In December 2015, the government decided that the benefit of LPG subsidy will not be available for consumers if the consumer s or his/her spouse had taxable income more than 10,00,000 during the previous financial year computed as per Income Tax Act, PAHAL (Pratyaksh Hasthantarit Labh) is the world s largest Direct Benefit Transfer Scheme. Through PAHAL, subsidy given to consumers is directly transferred to the registered account of, the consumer without involving any intermediary. More than crore consumers are registered to avail the subsidy as of PAHAL Scheme has been acknowledged by the Guinness Book of World Records as the largest cash transfer program (households). More than Rs. 38,276 crore of subsidy has been transferred to the LPG consumers through 204 crore transactions since inception of the Scheme. An intensive exercise was carried out for identifying duplicate / fake / ghost / inactive domestic LPG connections and, as of 01/04/2015, 3.34 crore such connections were identified. As a result of implementation of DBTL (PAHAL) mechanism, it became possible to block these 3.34 crore LPG connections as the subsidy was transferred in the accounts of only those consumers who had registered under PAHAL and who have been cleared after de-duplication exercise. For the financial year , for 3.34 crore consumers outside the PAHAL net, the estimated savings would be 3.34 crore x 12 cylinders x Rs (average subsidy per cylinder for FY ) equal to Rs.14, crore. Following a similar principle, the savings estimated for FY is Rs.6, 443 crore and the total savings for both the years works out to Rs.21, 261 crore. (PIB GOI, MOPNG) In May 2016, Prime Minister Narendra Modi launched a social welfare scheme with the name Pradhan Mantri Ujjawala Yojna. Under this scheme, the Government has approved Rs crore under the Pradhan Mantri Ujjwala Yojana (PMUY) for release of 5 crore deposit free new LPG connections to Women of BPL families over three years, i.e. FY , and The scheme will provide an initial cost of Rs. 1600/- for providing LPG connection to poor households in the name of the women of the household. The Prime Minister launched the scheme on at Balia, Uttar Pradesh. LPG connection to BPL families is being provided to the BPL family access to clean cooking fuel. The provision of LPG as a cooking fuel helps in addressing health problems caused by use of traditional sources of cooking fuel such as firewood, coal, cow dung, etc. This will in turn enhance productivity of woman, raise their quality of life by removing the drudgery associated with collection of wood and ensure them against non-availability of cooking fuel, at times. Under the scheme, the Government of India provides deposit free LPG connection of BPL families identified through the Socioeconomic Caste Census 2011 data, which includes security of one cylinder, pressure regulator, hose pipe, installation charges and DGCC Book. The consumer has to purchase an ISI standard gas stove, which is optional. Further, Oil Marketing Companies also finance the purchase of LPG stove and 1 st refill to BPL customers on an instalment basis, if they so desire. To ensure smooth supply chain of LPG cylinders to meet the demand, the Government is in the process of setting up of 10,000 new distributorships. The majority of these distributorships will come from rural areas to cater to underserved consumers. Page 129

13 As of , Oil Marketing Companies (OMCs) have released new LPG connections under Pradhan Mantri Ujjwala Yojana (PMUY). Conclusions: Subsidies are an inefficient way of protecting the poor, so they must be replaced by some more pro poor social spending by the government. The resources freed up by the subsidy reforms should be channelized to more productive public spending like on health and education and towards the development of infrastructure so that it may help in boosting job-creation over the long run without increasing a country s debt. Our Prime Minister has put forward many steps for reforms which have been accepted by our general public positively. References: 1. IEA. (2007). World Energy Outlook 2007: China and India Insights. IEA Publications. 2. CEE. (2000). LPG Subsidies in India. 3. Cell, petroleum planning and analysis. (2015a). PS_1_Fiscal Subsidy. 4. Cell, petroleum planning and analysis. (2015b). PS_2_b_UR_on_SensitiveProducts(H). 5. El-Katiri, L., & Fattouh, B. (2015). A Brief Political Economy of Energy Subsidies in the Middle East and North Africa. The Oxford Institute for Energy Studies, oies paper(february). 6. HARTENERGY. (2013). Global Refining and Fuel Report. 7. IMF. (2013). Case Studies on Energy Subsidy Reform: Lessons and Implications Page 130

org भ रत य भ ष, श, स हहत य एव ध ISSN 2321 9726

15 .. Shri Param Hans Education & Research Foundation Trust भ रत य भ ष, श, स हहत य एव ध ISSN INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SCIENCE & TECHNOLOGY ISSN (0) (P) INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SOCIOLOGY & HUMANITIES ISSN (0) (P) INTERNATIONAL RESEARCH JOURNAL OF SCIENCE ENGINEERING AND TECHNOLOGY ISSN (online) INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SCIENCE AND INNOVATION

India s Experiences and Lessons Learned with LPG Subsidy Reform. Presented by Shruti Sharma January 2016

India s Experiences and Lessons Learned with LPG Subsidy Reform Presented by Shruti Sharma January 2016 LPG Consumption by Sector Usage of LPG in 2014-15 ('000 tonnes) Manufacturing Sector Transport 1%