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BW Businessworld

Cooking Gas: Consumption Conundrum

277.6 million LPG consumers in the country, around 15 million are not eligi­ble for subsidy since December 2016 because of their annual taxable income exceeding Rs 10 lakh.

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Consider this. in 2014-15, there were 148.6 million LPG (liquefied petroleum gas) connections in India covering around 56 per cent of households — mostly located across towns and metros — with the yearly consumption per connection being 7-8 LPG cylinders (of 14.2 kg each). 

Cut to 2019-20. The overall LPG con­nections rose to 278.7 million but the yearly consumption average fell to six cylinders per connection, a drop of 22 per cent.

The increase in overall connections is understanda­ble given that in the four years since the launch of the Pradhan Mantri Ujjwala Yojana (PMUY) in 2016 mil­lions of consumers were added by providing subsidy on 12 cylinders per year through the Direct Benefit Transfer (DBT) route. But what is not immediately apparent is why the per connection yearly consumption average should fall instead of rising or staying at the earlier level. 

On the other hand, during these four years, at the behest of Prime Minister Narendra Modi, lakhs of mid­dle class people surrendered their subsidised LPG con­nections and switched over to non-subsidised cylinders thereby shelling out more. Overall consumption of LPG also rose — from 18 million metric ton (mmt) in FY15 to 26.4 mmt in FY20. 

Thus, one could logically argue that if the number of connections has risen along with overall consumption of LPG over the past four years then shouldn’t the per capita consumption have also recorded some growth? But why hasn’t that happened? 

Let us begin by looking at the macro picture first. Apparently, the government is believed to have saved Rs 59,000 crore in cooking gas subsidies since the implementation of the direct benefit transfer scheme PAHAL in FY2015. This scheme allowed elim­ination of fake/ inactive connections and reduced leakages. Alongside, there was the “Give It Up” campaign that urged well-to-do consumers to surrender gas connec­tions. As a result, the oil ministry’s overall fuel subsidy bill fell to Rs 37,606 in FY19 compared to Rs 76,300 crore in FY15. 

Also, of the 277.6 million LPG consumers in the country, around 15 million are not eligi­ble for subsidy since December 2016 because of their annual taxable income exceeding Rs 10 lakh. The balance 261.2 million consum­ers, who hitherto were eligible for subsidy under the DBT scheme, have ceased to benefit from it since September 1, 2020, as the price of subsidised and non-subsidised LPG cylin­der has become equal — at Rs 594, which no longer requires the government to make direct transfers to the account of the beneficiaries.

Falling Consumption 

The LPG coverage today is said to have reached 98 per cent. In simpler terms, there was a massive increase in the production, distribution and consumption of LPG across the country. But there is no corre­sponding increase in the consumption of LPG cyl­inders. Why? 

Explains Swarnendu Bhushan, Senior VP - Research, Institutional Equities, Motilal Oswal Financial Services. “We believe that almost doubling of the LPG coverage to 97.5 per cent in mere four years (since 2016) is yet to address all the challenges related to LPG adoption faced by poor house­holds. As per our understanding, many poor households are likely to be using alternative fuels as well, along with LPG,” he says. 

Deepto Roy, Partner, Shardul Amarchand Mangaldas & Co. says a more in-depth look at refill numbers and per connection consumption seems to suggest that the penetration of LPG connections may not be as wide­spread as it is being touted. Roy lists out two reasons for the decline in per capita consumption of cooking gas. “One, there is additional distribution of con­nections, for example, within larger fam­ily structures, and hence lower use against individual connections. The other reason could be that the refills are relatively more expensive, and after the initial connections, there is a return to the more traditional (and cheaper) fuels. Also, anecdotally, there have been instances where the subsidy amounts have been used for other purposes than refills (food etc, for instance),” he says. 

There has been a decline in refill orders too. In its report—made public in December 2019—on the lack of re-filling of LPG cylinders, the Comptroller and Auditor General (CAG) of India had pointed out that encourag­ing the sustained usage of LPG “remains a big chal­lenge”. Why? Because the annual average refill con­sumption of 1.93 crore PMUY consumers (who had completed more than one year as on March 31, 2018) was only 3.66 refills as worked out by audit. Similar analysis for 3.18 crore PMUY beneficiaries as on December 31, 2018, revealed that refill consumption declined to 3.21 refills per annum, the CAG’s ‘Performance Audit Report’ of the PMUY had said.

“The CAG report seems to suggest that there has been quite a significant decline. And the reasons are potentially inter-connected,” says Roy, adding that the common thread that emerges from the consumption and refill numbers is that while the initial free cylinders were seeing a robust offtake, that offtake went down remarkably after that. 

“The oil marketing companies are then left holding the baby because the only way they could have recov­ered the upfront cost of the con­nection was from subsequent refills.” 

What can be done to promote consumption and to clear any misrepresentation in the data? Experts offer some valuable sug­gestions. For example, the gov­ernment should encourage the use of LPG as a back-up for renewable energy. “There is a potential for cross-subsidizing domestic consumption in this manner,” says Roy. 

Then, there should be incen­tives in place for reduction in diversion of domestic cylinders for commercial use. Also, there may be an investigation ordered on the actual penetration (including sustainable penetra­tion) of the PMUY. The numbers suggest that there are a lot of “token” subscriptions (similar to accounts opened under the Jan Dhan Yojna which saw low or nil transac­tions activity subsequent to their opening). “An under­standing of the actual consumption levels will be vital to structure future subsidy mechanisms alongside the production and import requirements,” Roy adds. 

As per Bhushan of Motilal Oswal, the government’s focus on decreasing the subsidies on LPG cylinders for non-PMUY holders may give more ammunition to encourage PMUY users to refill their cylinders. 

“Going ahead, we believe that such households might completely move to using LPG (as income and aware­ness increases) and increase per connection consump­tion. In the longer run, growing urbanisation would also aid higher usage of LPG against alternate polluting fuels,” says Bhushan. We think so too. 

A unit level analysis of data from the 76th round of the National Sample Survey conducted by the National Statistical Office (NSO) across more than 100,000 households in 2018 showed that 43 per cent of PMUY beneficiaries were not using LPG for cooking. 

Meanwhile, here is the latest update on LPG. The beneficiaries under the PM Garib Kalyan Yojana, it has been announced, can receive free LPG cylinders till March 2021. More cylinders in the offing!