LPG PRICING MODEL

ANKIT APURVIndian Institute of Technology, Kharagpur

NEED FOR A NEW PRICING POLICY FOR LPG

WHY?

NEED FOR A NEW PRICING POLICY FOR LPG

EVER INCREASING BURDEN OF FUEL SUBSIDY

FACTS

• 9.3 MMT in 2003-04 to 12.3 MMT in 2008-09.

•Sale of subsidized domestic LPG cylinders constituted 86.5% (749 million cylinders of 14.2 KG) of total LPG sale in 2008-09.

•The consumer subsidy on domestic LPG has grown from Rs 5,523 crore in 2003-04

to 7,600 crore in 2008-09 and is estimated to be around Rs14,152 crore in 2009-10.

Source : Kirith Parikh Committee Report

PRICES

• Up to 9 units of cylinder at subsidized price of Rs410.50*.

•Beyond 9 units at market price of Rs942*

* New Delhi Prices

FEATURES

• Uniform price across all sections of the society (rural/urban, rich /poor).

•Household is chosen as a unit of consumption.

•A very sharply defined Limit.

•De-regulation of Market Prices

UNIFORM PRICES FOR ALL THE SECTIONS

UNIFORM PRICES FOR ALL THE SECTIONS

=

A VERY SHARPLY DEFINED PRICE LIMIT

A VERY SHARPLY DEFINED PRICE LIMIT

Households as a Unit of Consumption?

Households as a Unit of Consumption?

V/S

How to Decide the Number of Units to be Subsidized?

POLITICAL BARGAINING

POLITICAL BARGAINING

LPG as a Household Commodity

What part of household income goes into LPG consumption?

What part of household income goes into LPG consumption?

FEW OBSERVATIONS•It is seen that rural households use from 5.17 to 7.91 cylinders per year. The LPG-using rural households belonging to the four poorest deciles use less than 6 cylinders per year and the richer households use more.

•Rural households use less cylinders than urban households as the former have access to alternate fuels such as fuel wood.

• The households belonging to the poorest decile of urban consumers use8 cylinders whereas the top 5 deciles use 10 cylinders.

Who is Actually Getting the Subsidies?The LPG-consuming households in the top 3 decile in urban areas, comprising some 22 million households, use nearly 40 per cent of LPG and spend less than 5 per cent of their total expenditure. These households get a large part of the subsidy even when they have the capacity to pay the market price for LPG and will use LPG even when the price is raised.

Since providing universal subsidy through price below the cost misdirects the subsidy to the relatively affluent, a strong case can be made for subsidizing LPG as a clean cooking fuel for the poor.

Households as a Unit of Consumption?

WHYHouseholds as a Unit of Consumption?

Administrative Impossibility

Smart Card

Need for an Effective System• If the poor are to be subsidized, we need an effective mechanism to provide the subsidy.

•A smart card system or transfer on entitlement based on the UID platform can be used which entitles a household a fixed quantity of LPG at subsidized price beyond which the market price would be charged.

•Alternatively, direct cash transfer may be provided and everyone is charged the market price.

Need for Promotion of LPG as a clean fuel