How Modi’s own ministries are sabotaging the efforts of the Ujjwala scheme

Expansion of the Ujjwala scheme in the wake of the elimination of LPG subsidies is a classic example of muddled policy making.

WrittenBy:Chintan Patel
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On August 10, prime minister Narendra Modi launched Ujjwala 2.0, a scheme to distribute up to one crore free gas connections to poor households that don’t have one. In parallel, the price of a gas cylinder reached an all-time high of Rs 859.50 on August 17.

In this piece, we will discuss how the faltering economy is forcing the government to sabotage the success of one of its signature welfare schemes: Ujjwala.

Ujjwala 2.0 is the successor to Ujjwala 1.0, one of Modi’s most popular and well-received schemes in his first term, under which the central government distributed over eight crore free LPG connections from 2016 to 2019. Using cooking gas eliminates the need to forage for fuel for cooking fires, thereby offering significant time saving and convenience. Moreover, it reduces indoor air pollution caused by cooking fires, thereby preventing respiratory illnesses.

Awareness of these benefits seems clear with the launch of Ujjwala 2.0, as the government has indicated that the response to the scheme has been tremendous, with over 60 lakh new applications within the first week.

In a live interaction with a group of beneficiaries during the launch of the scheme, Modi highlighted the substantive improvements that an LPG connection signifies in quality of life. To be fair, most of the touted benefits are real and so, Modi’s enthusiastic championing of this cause is both well-intentioned and justified.

Except that his own petroleum and finance ministries are sabotaging his noble efforts to help women across the nation.

How? Read on to find out.

In recent weeks, the record prices for petrol and diesel have garnered much attention, both in media coverage and government statements. But the price hikes on its less glamorous cousin – domestic LPG – have slipped somewhat under the radar.

Figure 1 charts the price of a 14.2 kg cylinder (the red, ubiquitous cylinder we are all familiar with) in Delhi from 2015 to 2021. Historically, there have been two price tags on cylinders: a market/non-subsidised price and a subsidised price. Each customer (with an annual taxable income less than Rs 10 lakh) is allowed to purchase 12 cylinders at the subsidised price each year. The subsidy is automatically deposited in the customer’s account after a cylinder is purchased at the market price.

As a reference point, there are roughly 29 crore LPG consumers in India, as of August 2021. Of this, around 1.5 crore do not qualify for a subsidy due to income thresholds. Over 99.9 percent of all households in India have access to an LPG connection, as per government reports. This number has almost doubled since 2015, when an estimated 14.8 crore families had a gas connection. As mentioned earlier, around eight crore of these new LPG customers were beneficiaries of the original Ujjwala scheme that ran till 2019.

With that background knowledge, let us look at the pricing chart below.

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Some interesting observations emerge.

1. From June 2015 to January 2020, the price of a subsidised cylinder was fairly steady. The government was maintaining a stable price by adjusting the subsidy to compensate for fluctuations in LPG market price.

In January 2020, the price of a subsidised cylinder increased from Rs 494 to Rs 567, which was the start of a steady and steep increase in the months to follow. This spike from June 2019 to January 2020 can be largely attributed to the increase in market price of LPG. The price of a non-subsidised cylinder hit an all-time high of Rs 858 in January 2020 – a 35 percent increase from June 2019 when it was Rs 637.

The market price of LPG or the cost borne by oil marketing companies is tied to the price benchmark set at the beginning of each month by Saudi Aramco, Saudi Arabia’s state-owned oil company and largest global supplier of LPG. Saudi Aramco, in turn, sets the monthly price based on supply-demand dynamics and price of crude oil. Since the benchmark pricing is in US dollar, the market price of LPG in India is also affected by currency exchange rates.

2. June 2020 is perhaps the most important data point on this chart. The international prices on LPG crashed from their highs of January 2020 due to the pandemic However, the price of a subsidised cylinder increased from Rs 567 to Rs 593. So, while the cost of procurement of LPG decreased by 33 percent, the cost of a cylinder increased by 4.5 percent. This counter-intuitive trend is similar to what is happening with petrol and diesel prices. (Please read this piece for an in-depth look at petrol and diesel pricing). The difference is that for petrol and diesel, the price increase was due to increased tax, whereas for LPG cylinders, the price increase is due to subsidy elimination.

As you can see on the chart, the subsidy component vanishes starting June 2020. The government basically decided to scrap the LPG subsidy in May 2020, without making a formal announcement to that effect.

While the central government stopped subsidising LPG in May 2020, it did offer three free LPG refills to the eight crore beneficiaries of Ujjwala 1.0 from April 2020 to September 2020 as part of its Covid relief package. So, effectively, the brunt of high prices was not felt by the poor till after September 2020.

3. LPG prices have continued to increase since June 2020. The data on the chart is till June 2021 at which point the cost of a LPG cylinder was Rs 809. As of August 17, 2021 the price has risen to Rs 834.50 per cylinder. Thus, compared to June 2015, the price of one cylinder of subsidised LPG has increased over 100 percent and, compared to June 2019, it has increased over 70 percent. To put this in perspective, retail inflation from 2015 to 2021 is around 37 percent and from 2019 to 2021 is less than 12 percent.

So, what might have prompted the Modi government to do away with the LPG subsidy at the height of the pandemic? The state of government finances might provide a clue.

Figure 2 shows the amount spent by the government on LPG subsidies. Note that this is the total amount spent on LPG subsidies which includes the subsidy/cylinder given to each eligible customer, the cost of the initial LPG connection and refill granted under the Ujjwala scheme, freight subsidy given to Northeastern states, and administration costs. That said, over 70 percent of total expenditure is spent on subsidised cylinders each year.

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What are the key takeaways from this figure?

1. The government expenditure on LPG subsidy increased from Rs 15,656 crore to Rs 34,085 crore from FY 2017-18 to FY 2019-20 – a whopping 117 percent increase in just two years. This increase was primarily driven by the success of Ujjwala 1.0.

2. For FY 2020-21, the expenditure increased by almost Rs 2,000 crore compared to the previous year. This despite the government’s decision to scrap the LPG subsidy in May 2020. This seems like an aberration in the budget reporting, and may be corrected when actual spending for 2020-21 is released in the union budget of 2022-23. (The union budget lags reports revised spending estimates for the prior year and actual spending numbers from two years ago.)

3. The estimates for 2021-22 are perhaps the most telling statistic in this figure. With the LPG subsidy gone, the government spending on LPG is down by around Rs 20,000 crore or 41 percent compared to 2019-20. Moreover, a bulk of this Rs 14,000 crore earmarked for 2021-22 is to fund Ujjwala 2.0 – a one-time expense, not an annual commitment like the LPG subsidy.

This decision to eliminate the LPG subsidy liability and save roughly Rs 30,000 crore year on year (considering that the allocation for 2021-22 is a one-time expense) was likely prompted by the budget deficit. As has been discussed elsewhere, an already-faltering economy was dealt the massive shock of Covid. As a result, government tax revenue has gone down while the demands on government spending have gone up. This is best illustrated by the deficit numbers from the 2021-22 union budget, given below.

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The spike for FY 2020-21 (revised estimates) shows that the fiscal deficit has increased from 4.6 percent of the GDP to 9.5 percent of the GDP. The government is clearly in a financial hole and is looking for different ways to trim its expenses. The LPG subsidy is one expense it has deemed expendable.

While this decision is financially prudent, there is reason to rethink this.

It is clear that steep price hikes will discourage LPG usage and cylinder refills. In fact, even before the subsidies were removed, there have been reports on how utilisation of LPG by Ujjwala beneficiaries has been limited, partly due to the cost of refill. A 2019 audit of the Ujjwala scheme by the Comptroller and Auditor General of India made this observation:

“PMUY, having main focus on providing LPG access to BPL households, has helped to increase the LPG coverage in the country from 61.9 percent (May 2016) to 94.3 per cent (March 2019) as the pace of releasing connections witnessed a surge after launch of E-PMUY (March 2018) by including BPL beneficiaries apart from SECC-2011 database. However, the consumption pattern showed a downward trend of average annual refill consumption from 7.5 to 6.73 refills by non-PMUY consumers and from 3.9 to 2.98 refills by PMUY beneficiaries from 2016-17 to 2018-19.”

Elsewhere in the report, it cites the cost of refill as a reason behind low refill levels:

“Audit noticed that only 0.24 per cent beneficiaries were provided 5 kg cylinder although expenditure finance committee and PPAC-CRISIL report had highlighted the importance of small 5 kg cylinder to make the scheme successful considering the high refill cost as a major barrier to LPG usage.”

The LPG subsidy is perhaps best conceptualised as a public health initiative, rather than a populist “freebie” that India can ill-afford, which is often the template used for thinking about most subsidies. The scientific evidence on the health benefits of replacing traditional fuel-burning fires for indoor cooking is robust. While exact numbers vary, it is safe to say that hundreds of thousands of respiratory illnesses and deaths can be prevented by switching to LPG. There are also environmental gains to be had in reducing carbon emissions.

Covid has brought renewed focus on our public health infrastructure and health policy. Any initiative that improves preventative health is more effective and efficient when it comes to public health. The LPG subsidy is a government intervention that promotes public health, and the cost it imposes on the exchequer should be weighed against the costs incurred by the healthcare system (and private individuals) in its absence.

The more bizarre aspect of policy making is the expansion of the Ujjwala scheme in the wake of the subsidy elimination. The credit claimed by providing the many benefits of providing LPG cylinders rings hollow when you are effectively jeopardising the ability to use them on a regular basis.

Announcing Ujjwala 2.0 - a scheme that offers free LPG connections whilst simultaneously making LPG refills unaffordable for the poorest who benefit from this scheme – smacks of muddled policymaking.

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