Socio-economic Impacts of an LPG Subsidy Removal on the Household Sector in India

Sangeeta V. Sharma and Vinod K. Sharma

Chapter 5 in Institutional Policy and Economic Impacts of Energy Subsidies Removal in East Asia, pp 83-99 from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: This study examines the socio-economically acceptable strategies that India should adopt for removing its liquefied petroleum gas (LPG) subsidies. In India, a large number of rural households and poorer households in urban areas still use inefficient fuels for cooking and other household needs. The use of clean forms of energy, namely LPG, as a cooking fuel and for lighting, is mostly restricted to urban and affluent households. This energy-use inequity has adverse socio-economic impacts, such as negative effects on health, increased deforestation, and environmental degradation. The Government of India provides large subsidies on LPG use in the household sector, resulting in a negative impact on the country’s economy. To reduce the LPG subsidy burden on the fiscal budget, the Government of India has introduced many ameliorative measures, such as fixing the number of annual subsidised LPG cylinders per household, providing direct beneficiary cash transfers, and encouraging affluent consumers to forgo their subsidies. In our study, we use sets of regressions to predict the socio-economic impacts of the removal of LPG subsidies on the Indian economy. However, a limitation of our analysis is the availability of data, as we use data for the period 2001–2014. This data is available only on an annual basis, so we have 14 observations per variable for all sets of regressions. From our analysis, we infer that the impact of the LPG subsidy removal indicates a positive relationship between gross domestic product and the consumption of LPG, as income generated during the fiscal year is positively related to LPG consumption. Secondly, estimating the total LPG subsidy as a function of total consumption, we see that consumption is not a determinant of the total subsidy bill of LPG. Thirdly, when total LPG consumption is regressed on the LPG market price, gross domestic product, and the regressand’s lagged value, the results indicate that the price of LPG, with or without the subsidy, is not a significant determinant of its consumption expenditure. Finally, evaluating the macroeconomic impact of a change in the LPG subsidy on the economy suggests that the rate of growth of the economy is not affected by changes in the LPG subsidy. Thus, we summarise that removal or reduction of the current LPG subsidy will not have a significant impact on the Indian economy.

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