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Transcript of Kerosene Subsidies
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 19Electronic copy available at httpssrncomabstract=2047018
Kerosene subsidies in India When energy policy fails as social policy
Narasimha D Rao
International Institute for Applied Systems Analysis (IIASA) Schlossplatz 1 A2361 Laxenburg Austria
a b s t r a c ta r t i c l e i n f o
Article history
Received 8 August 2011
Revised 23 December 2011
Accepted 23 December 2011
Available online 26 January 2012
Keywords
Kerosene
Developing countries
Climate change mitigation
India
Energy subsidies
Distributional impacts
Kerosene subsidies intended for Indian households have been known for their poor targeting and high 1047297scal
costs However the distributional bene1047297ts to the 160 million households that use kerosene are not well un-
derstood In this paper the kerosene subsidy is formally assessed as an instrument of income redistribution
The subsidy incidence progressivity and ef 1047297
cacy of the kerosene subsidy are calculated for the state of Ma-harashtra under actual and ideal implementation conditions
The analysis shows that kerosene subsidies are regressive and of minimal 1047297nancial value to poor rural house-
holds This is in part because household quotas are based on cooking needs but kerosene is used predomi-
nantly for lighting In urban areas subsidies are progressive and provide bene1047297ts of up to 5 to 10 of
household expenditure among poorer households which lack affordable access to LPG and biomass Overall
only 26 of the total subsidy value directly reaches households This analysis suggests that subsidies targeted
only to kerosene-dependent urban areas would have a higher ef 1047297cacy than broad-based subsidies
copy 2012 International Energy Initiative Published by Elsevier Inc All rights reserved
Introduction
Energy consumption subsidies have attracted renewed attentionwith the urgency of climate change (UNEP 2008) Globally annual
consumption subsidies for electricity and fossil fuels outside the
OECD were estimated at about a quarter trillion dollars in 2005 or
07 of world GDP (IEA 2007) These subsidies are often justi1047297ed as
instruments of redistribution in many developing countries in part
because of the lack of broad-based institutions that enable direct
cash transfers (Piketty and Qian 2009) However these subsidies in
many developing countries incur high costs encourage wasteful con-
sumption and increase greenhouse gas emissions without necessarily
providing intended bene1047297ts to the poor The International Energy
Agency (IEA) estimates that the cost to economic growth from con-
sumption subsidies in just the eight largest non-OECD countries is
257 billion dollars (IEA 1999) Among household cooking fuels
while LPG subsidies typically bene1047297
t higher income households thedistribution of bene1047297ts from kerosene subsidies are more ambiguous
(Heltberg et al 2003) This is part due to kerosenes usage among
urban low-income groups such as in India Nepal Vietnam and
South Africa
According to the IEA India is among the highest of the non-OECD
subsidizers of energy consumption with subsidies of over $10 billion
peryear despite undertaking price reform of fossil fuels in the last de-
cade With the recent run-up in world crude oil prices since 2005 the
cost of subsidiesmorethan doubled (Shenoy 2010) Kerosene usealso
accounted for over 28 million tons of CO2 emissions in 2004ndash051 or
over 2 of the countrys CO2 emissions A number of expert commit-
tees commissioned by the Indian government in the past have recom-mended phasing out the kerosene subsidies and replacing them with
alternative subsidy mechanisms (Chaturvedi 2008 Parikh 2010)
Government reports show that kerosenes use as a primary fuel for
lighting and cooking has been on the decline However these assess-
ments neglect the widespread use of kerosene as a supplementary
fuel for both lighting and cooking Considering all uses the potential
removal of kerosene subsidies could affect over 160 million Indian
households (or 800 million people) In rural areas kerosene is mostly
used for lighting while in urban areas cooking is the predominant
use About 350 million people (in 74 million households) who lack
electricity access use kerosene for lighting but millions of others in
both rural and urban areas with electricity access use kerosene for
lighting during power outages which are frequent and chronic Sim-
ilarly although about 19 million rural households (~12) and 58million urban households (~102) use kerosene as their primary
cooking fuel another 28 million households in rural areas and 55
million urban households likely use kerosene as a supplementary
fuel for cooking andor water heating2 In total cooking use may
Energy for Sustainable Development 16 (2012) 35ndash43
E-mail address nraoiiasaacat
1 Assuming emissions of 25 kg CO2l from 11 billion l of annual consumption in
2004ndash05 (Indiastatcom)2 Cooking use is estimated based on the assumption that households use no more
than 4 liters per month for lighting Two sources make this a reasonable upper bound
An average kerosene lantern (~37 lumens) used for 4 hours a day would not consume
more than 3 liters per month In India lanterns vary from 12 to 80 lumens Second
households in all income deciles without electricity access consumed 275ndash39 l per
month on average as per the National Sample Survey of India 2004ndash05
0973-0826$ ndash see front matter copy 2012 International Energy Initiative Published by Elsevier Inc All rights reserved
doi101016jesd201112007
Contents lists available at SciVerse ScienceDirect
Energy for Sustainable Development
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 29Electronic copy available at httpssrncomabstract=2047018
have contributed 23 of the 72 billion l of kerosene consumed in
Indian households in 2004ndash05 which amounts to about 15 of total
consumption in rural areas and 44 of kerosene consumption in
urban areas
Subsidized kerosene is distributed across the country through the
Public Distribution System (PDS) which consists of over 460000 pri-
vate licensed retailers who sell subsidized grains and kerosene In
contrast with LPG and subsidized grains which are sold in ldquodualrdquo
markets ndash
one subsidized and the other an open market ndash
keroseneis sold only through the PDS (ldquoPDS kerosenerdquo) However PDS kero-
sene is leaked to black markets through well-established channels
in the distribution chain where it is sold to households at higher
prices or as an adulterant to automotive fuels In Maharashtra the
site of this study these distribution channels are often controlled by
organized crime syndicates3
The Kirit Parikh expert committee recommendation to reduce
kerosene subsidies is justi1047297ed in part from their 1047297nding that the in-
come shocks on poor households on average would be fairly small
(Parikh 2010) Their recommendation rests largely on the premise
that kerosene is used primarily for lighting in rural areas However
these averages mask the distribution of bene1047297ts particularly to the
41 million households who cook with kerosene and therefore use
larger quantities Though kerosene subsidies in India are known to
be poorly targeted due to these diversions their distributional bene-
1047297ts are not well understood (Gangopadyaya et al 2005 Morris
et al 2006)
In this paper I formally examine the performance of the kerosene
subsidy as an instrument of redistribution using several measures I
evaluate the subsidys materiality (how does the energy budget
change with its removal) and its progressivity (do poor households
bene1047297t more than the average household) For purposes of compari-
son with other redistributive policies I assess ef 1047297cacy (what share
of the total subsidy value goes to poor households not counting
indirect impacts4) Among the novelties of this study is that I explore
the distinction between implementation failures and design limita-
tions and evaluate the subsidy bene1047297ts under ideal implementation
conditions This is also the 1047297rst use of ef 1047297cacy metric in terms of
subsidy value rather than quantity This study highlights an underem-phasized feature of kerosenes use as a cooking fuel in urban areas
The study does not consider recycling of government revenues from
removing subsidies that may offset the income shocks such as
through other redistributive schemes (eg food stamps) Thus the
absolute impact on energy budgets may be considered an upper
bound The focus of this study is the relative impacts on different
types of households
Previous literature
As mentioned several studies examine the macroeconomic costs
of energy subsidies in developing countries On the bene1047297t side the
World Bank 1047297nds that in general quantity-based utility subsidies
tend to be regressive because their use increases with income(Komives et al 2005) However this principle does not apply to ker-
osene whose use does not correlate well with income particularly
when considering its use for cooking This makes its distributional
bene1047297ts more dif 1047297cult to predict Many case studies in various devel-
oping countries examine the income bene1047297ts or the progressivity of
household fuel subsidies (Dube 2003 Gangopadyaya et al 2005
Hosier and Kipondya 1993 Kebede 2006 Komives et al 2005
Morris et al 2006 Olivia and John 2008 Pitt 1985) Among these
studies that examine kerosene generally 1047297nd that kerosene subsidies
provide income bene1047297ts to the poor and that kerosene use tends to
1047297rst increase and then decrease with income
The high 1047297scal and environmental costs of household fuel subsi-
dies in India have been well documented in the above cited studies
Economists estimate that kerosene subsidies in particular cost
the government $4ndash6 billion per year and carry ef 1047297ciency losses5 of
$1ndash2 billion per year (IEA 1999 Morris et al 2006) It is well
known that suppliers and distributors divert 40ndash66 of kerosene allo-
cated for states to other lucrative markets such as transportation
6
forcing some households to purchase kerosene in the black market
(NCAER 2005 Shelar et al 2007) But the 1047297nancial impacts of
the subsidies that do reach households are not formally estimated
One study of fuel taxation in India 1047297nds that the direct income bene-
1047297ts from household kerosene use are progressive (Datta 2010) How-
ever the study offers limited detail on underlying regional differences
and causes Further progressivity alone may not justify public spend-
ing on kerosene subsidies Subsidies may be regressive but still
provide substantial income relief to the poor Conversely even if ker-
osene subsidies are progressive other less progressive redistributive
policies may have higher impacts on poverty and cost less to deliver
The ef 1047297cacy measure used in this study provides a metric for such a
comparison across policies
Many studies illustrate the inappropriateness of encouraging ker-
osene use for lighting but no study critiques the subsidy for cooking
use Many studies have pointed out that kerosene lamps are the
most expensive and inef 1047297cient form of lighting (Dutt and Mills
1994 Mahapatra et al 2009 Reddy 1981) Rehman Malhotra et al
(2005) have pointed out that rural kerosene quotas are based on
cooking but used only for lighting However subsidy quotas may be
better suited to urban kerosene use for cooking In this study I assess
the contribution of design and implementation failures to targeting
ef 1047297cacy of kerosene subsidies in urban and rural areas
This study relies on data from the National Sample Survey of India
for Consumption Expenditure 2004ndash05 (NSSO0405) and draws qual-
itative insights from a primary survey I had conducted of 450 house-
holds in urban and peri-urban parts of Maharashtra in 20092010
(ldquoprimary surveyrdquo)
In Section 2 I describe the various uses for kerosene in differenthousehold in Maharashtra and how these functions in1047298uence the
subsidys relative bene1047297ts In Section 3 I discuss the measurement
approach and the results of the subsidy performance analysis In
Section 4 I discuss the subsidy performance under ideal implemen-
tation conditions I close with some policy recommendations in
Section 5
Kerosene market and use characteristics in Maharashtra
In Maharashtra 70 of households (68 million people) use
kerosene Of these about 50 million users are in rural areas (91 of
the rural population) and 18 million are in urban areas (49 of the
urban population)Urban use of kerosene is higher in Maharashtra than in the rest of
the country and even more so in the vast slums of metropolitan
Mumbai (Fig 1) The average kerosene consumption among house-
holds earning less than Rs 4000 per month (or $250 PPP) in urban
Mumbai was over 10 l per month As a result though 26 of kerosene
users in Maharashtra are in urban areas they consume 45 of total
household kerosene use in the state
3 See lsquoMaharashtra Cracks Down on Oil Ma1047297arsquo Hindu Business Line January 28 20114 Kerosene that is diverted to automobile and other markets have income distribu-
tional impacts as well such as the rents earned by middlemen or the marginal pro1047297ts
earned by bene1047297ciaries of adulterated fuel Data on these diversions are unavailable
5 Ef 1047297ciency losses refer to reduced aggregate income from the misallocation of in-
vestments in response to price signals that do not re 1047298ect actual costs In economic jar-
gon this is calculated as the lsquodead weight lossesrsquo that result from pricing below
marginal cost6 In transportation kerosene is used to adulterate gasoline and diesel In construc-
tion kerosene is used in making tar for paving roads
36 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 39
Kerosene is used widely across income groups This is in contrast
to LPG which is a preferred cooking fuel and whose use correlates
well with income as shown in Fig 2 One reason for this is that
kerosene is often used as a backup cooking fuel to LPG and biomass
to meet gaps in supply availability which does not necessarily
depend on income
Two underemphasizedcharacteristics of kerosene use in households
are important in understanding the bene1047297t incidence of subsidies
actual kerosene market prices and kerosenes use as a cooking fuel
These are discussed next along with how they affect subsidy bene1047297ts
Kerosene markets
Households are supposed to purchase all their household kero-
sene needs through the Public Distribution System (PDS) To use the
PDS households register their household characteristics on ration
cards which indicate various eligibility criteria on the basis of
which each households quota is calculated and in turn each ration
shops aggregate quota is calculated based on the households allotted
to each shop However households in Maharashtra purchase over
40 and in urban areas over 50 of their consumption from second-
ary (black) markets (Table 1)For kerosene unlike other subsidized products householdsrsquo quotas
are de1047297ned based on their assumed reliance on kerosene for cooking
and not on their poverty status7 Lighting needs are not included in
the design of the quota The quota criteria include two household
characteristics the number of LPG cylinders8 and household size
(See Appendix A) Households with two cylinders are not entitled to
kerosene Households with one cylinder are entitled to 4 l per month
The quota of households without any LPG cylinders increases with
family size up to a maximum of 15 l for most areas or 24 l in particular
urban areas Both criteria however weakly correlate to income Lower
income households tend to have fewer LPG cylinders and larger fami-
lies Thus in principle the kerosene subsidy does have the potential to
serve as a redistributive instrument but an imperfect one
About 130 million l were allocated on a monthly basis to rationshops in 2004ndash05 of which about 129 million l on average were
claimed for distribution9 A bottom-up aggregation of household
quotas from NSSO0405 indicates that 118 million l ought to have
been allocated The discrepancy may re1047298ect a margin of error from
using a sample survey to determine householdsrsquo eligibility criteria10
and the likely mismatch between households actual and recorded
eligibility Regardless as mentioned earlier a large share of this allo-cation is diverted upstream to third parties who sell kerosene to other
markets and to households in the black market As a result based on
an aggregation of the sample in NSSO0405 only 40 million l of the
118 million l of subsidized kerosene were purchased by households
through the PDS and only 68 million l consumed by households
Notably in rural areas the quota (80 million l) is more than double
actual consumption including black market purchases (37 million l)
This mismatch between the quota and actual demand encourages
kerosenes diversion to other markets
While this quantity diversion is well understood the prices in
these markets have not been analyzed in literature The market prices
for kerosene vary widely but on average are double that of PDS ker-
osene These prices are the lowest alternate price most households
would face should kerosene subsidies be lifted11
More importantlythe PDS kerosene price that households actually pay also varies
widely but only to a minority of households (Fig 3)
About 56 million people in Maharashtra (13 of PDS kerosene
users) bought PDS kerosene at above Rs 12l (higher than the highest
intended price including transport and pro1047297t) in 2004ndash05 In many
districts prices are as much as double the wholesale rate
Fig 1 Variation in urban household kerosene use mdash Mumbai Maharashtra and India
2004ndash05
a) Rural
b) Urban
Source National Sample Survey of Consumption Expenditure 2004-05
Note Kerosene use below 4 liters is assumed to be for lighting
Fig 2 Cooking fuel shares by income decile mdash Maharashtra 2004ndash05
7 Ration cards are issued to citizens of India which delineate broad categories of an-
nual income for households yellow (bRs 15000 below poverty line) saffron (Rs
15000-Rs 100000) and white (gtRs 100000) Food subsidy quotas are allocated based
on these categories8 Households purchase LPG in cylinders that typically contain 142 kg of LPG House-
holds pay a deposit to get a cylinder then subsequently buy re1047297lls by swapping out
empty cylinders for full ones Households face delays in receiving re1047297lls Thus house-
holds that can afford two cylinders have a reliable supply9
lsquoState-wise Superior Kerosene Oil (SKO) Allocated under Public Distribution Sys-
tem (PDS) in India mdash 2004ndash5 to 2007ndash8 and lsquoState-wise Superior Kerosene Oil (SKO)
Uplifted under Public Distribution System (PDS) in India mdash 2004ndash5 to 2007ndash8 IndiaS-
tatcom These allocations and claimed 1047297gures have remained fairly constant in the
time period covered by the data source
10 See Appendix A for how the household quota was inferred from sample survey
data11 Theoretically one would expect that black market prices would be set by the prices
of fuels that they substitute in other markets namely diesel In reality black market
prices are lower and vary by region due to market imperfections Data on black mar-
ket prices are available in NSSO0405 in household surveys as the price of lsquootherrsquo kero-
sene purchases made outside the PDS
37ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 49
Kerosene as Primary Cooking Fuel in Urban Households
A neglected fact in subsidy analysis is that many urban households
rely exclusively on kerosene as a cooking fuel In Maharashtra about
12 of urban households (1 million households 45 million people)
fall into this category In my primary survey 33 (of 450) households
all slum dwellers who did not have access to wood and who stated
they could not afford LPG cooked exclusively with kerosene These
circumstances may be commonplace among the urban poor across
India particularly in large metropolitan areas
These households on average use more kerosene than all keroseneusers and therefore stand to bene1047297t the most from kerosene subsidies
Kerosene use as secondary cooking fuel
Even though the vast majority of rural households do use kerosene
primarily for lighting kerosene use as a secondary cooking fuel is
widespread (See Table 2)
In urban Maharashtra 10 million out of 18 million kerosene users
use it as a secondary cooking fuel As mentioned Maharashtras house-
hold quota allocation scheme is indeed based on household cooking
needs This group of households not only would consume more
kerosene than lighting users but a subset of them might also pay a dif-
ferent replacement price in the absence of subsidies namely LPG prices
The distribution across income groups of kerosene use as a
cooking fuel also varies between urban and rural areas (Fig 4)
These patterns are explained by their relative reliance on LPG
which is more closely tied to kerosene usage In rural areas kerosene
use increases with income since LPG use increases with income
Among poorer households kerosene is used as a backup to wood
albeit to a lesser extent when wood is unavailable (such as during
monsoon) or too expensive (where purchased)
In contrast in urban areas such secondary use is highest among
lower and middle income groups but then decreases with income
at the highest income levels as more households have two LPG cylin-ders or piped gas supply
Drivers of kerosene use as a secondary cooking fuel
An important feature of kerosenes secondary use is that it is driven
not only by unreliable supply of households rsquo primary fuel but also by
the desire to save fuel costs Households for which kerosene is cheaper
than LPG on a useful energy basis (ldquoEconomy Usersrdquo) use kerosene re-
gardless of LPG availability12 Based on a heuristic to identify Economy
Users (discussed in Section 3) there are about 4 million such users in
Maharashtra One indication of this phenomenon is that a large number
of households use different fuels for cooking and for water heating re-
gardless of their supply conditions13 For example in the primary sur-
vey 60 of all households and almost all low-income households usedifferent fuels for cooking and water heating respectively regardless
of their primary fuel Many low-income urban households particularly
in Mumbai use LPG for cooking and kerosene for water heating
The importance of the distinction between Economy Users and those
using kerosene due to insuf 1047297cient LPG supply (ldquoLast Resort Usersrdquo) is
that the former bene1047297t less from subsidies since they can switch back
to LPG if cooking with kerosene becomes more expensive14 Note that
some low-income households who use kerosene because they would
otherwisepay more forusing wood may switch back to wood if kerosene
subsidies are removed However in Maharashtra this group was found
to be negligibly small and was therefore omitted from the analysis15
It would seem that the margin of subsidy bene1047297ts for Economy
Users is small For these households the economics of cooking with
LPG and kerosene depend on their relative energy (rather than lifecycle) costs since these households already own an LPG range and
kerosene stove (Fig 5) A rough calculation of the energy used for
heating bath water shows that the total savings from using subsidized
kerosene in comparison to subsidized LPG may be up to Rs 30 per
a) Subsidy Prices
b) Black Market Prices
Source National Sample Survey 2004-05 Sales prices shown for all retail sellers in the state
Fig 3 PDS kerosene prices by quantity sold mdash
Maharashtra 2004ndash
05
Table 1
Kerosene consumption by market Maharashtra 2004ndash05
Monthly
million liters
HH quota
total
HH PDS
purchase
HH black market
purchase
Diversions to
other markets
Rural 80 25 12 42
Urban 38 15 16 7
Totals 118 40 28 50
Source for PDS and black market purchases National Sample Survey Consumption
Expenditure 2004ndash5
See Appendix A for details on quota estimation
Numbers dont add due to rounding
Table 2
Household kerosene use by function region and priority in Maharashtra
Million users Lighting Cooking
Primary 122 (R) 13 (U) b01 (R) 45 (U)
Secondarya NAb gt170 (R) gt100 (U)
Source National Sample Survey of Consumption Expenditure 2004-05a Secondary use for cooking estimated as households with LPG or wood use and
gt4 lmonth of keroseneb The purpose of kerosene use up to 4 l cannot be inferred from NSSO data
12 A numberof otherfactors in1047298uence households cookingfuel choicesother thanfu-
el economy otherwise lsquoEconomy Usersrsquo would not use LPG at all Non-economic prefer-
ences for cooking fuel are a rich and underexplored topic in literature that merits
further research13 This was observed in the household survey14 The heat content of the fuels and their stoves ef 1047297ciencies determine their cost in
energy terms given fuel prices15 Wood was found to be more expensive than PDS kerosene on an energy basis for
only about 230000 households There may be some others who do not show wood
use in the survey but have wood stoves but there is no way to identify this group from
NSSO data
38 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 59
month for a family of seven 16 This is less than a half a percent of poor
householdsrsquo monthly expenditure Such households may overesti-
mate these savings or consider even such small savings worthwhile
Households that cook with black-market kerosene pay approxi-
mately the same fuel price as LPG (about Rs 22kg on average in
urban Maharashtra) which implies they pay more on an energy basis
than they do to cook with LPG (since kerosene stoves are less ef 1047297cient)
This suggests thatLPG users whobuy black marketkerosene forcooking
must also be Last Resort Users who lack reliable access to LPG
In summary Economy Users may represent a minority of kerosene
users However the 1047297nancial risk to them of removing subsidies is
signi1047297cantly less than others given the thin margins of savings from
using subsidized kerosene over LPG To the extent possible differen-
tiating these households would be important in calculating the distri-
bution of subsidy bene1047297ts
Assessment of subsidy performance
In this section I discuss the merits of kerosene subsidies as a redis-
tributive policy based on three measures materiality progressivity
and ef 1047297cacy I 1047297rst present the measurement approach and metrics
I then discuss the results and the drivers of low ef 1047297cacy
Measurement approach
I 1047297rst present the method for calculating individual household
bene1047297ts in terms of budget share based on the categorization of
kerosene users discussed in the previous section Based on these
budget shares I estimate progressivity and ef 1047297cacy
Several approaches have been used to assess the distributional
bene1047297ts of subsidies to households in other developing countries Acommon approach is to compare energy budgets with and without
the subsidy (Dube 2003 Kebede 2006) for different types of house-
holds I use a similar approach to estimating materiality Dube (2003)
compares households willingness to pay to the price they would pay
without subsidies However this carries a hypothetical bias Instead I
use market prices for substitutes to evaluate budget impacts Saboohi
(2001) calculates Lorenz curves for energy subsidy bene1047297ts to assess
progressivity Olivia and Gibson (2008) use an aggregate welfare
measure that incorporates an inequality aversion parameter Both
approaches capture equity in terms of inequality but not necessarily
poverty impact In order to capture the subsidy bene1047297ts around an
absolute poverty threshold I use a Growth Incidence Curve as de-
scribed below
Previous studies that quantify the impact of subsidy diversions in
India focus on the quantity of subsidized kerosene that households
actually receive I also account for the actual PDS kerosene price
paid by households which varies signi1047297cantly around the intended
subsidized price
Materiality
The value to households of the subsidy is a reduction in energy
expenditure which enables more discretionary spending on other
goods In contrast to prior studies that focus on mean bene1047297t inci-
dence for households in an income decile I calculate the bene1047297t for
different types of households based on fuel choices which affects
the price they would pay with the subsidys removal In particular
Economy Users would switch to LPG while Last Resort would be
forced to continue using kerosene and pay black market prices
Identifying Economy Users required a heuristic in the absence
of data on LPG reliability Note that all households fall into the 1047297rstcategory (including primary cookinglighting users) except for
those select LPG users whose cost of using subsidized kerosene is
less than that of LPG in energy terms The prevailing relative prices
of LPG and kerosene for a household were used as proxies to identify
this group If households used kerosene as a supplemental fuel even
when LPG was cheaper on an energy basis they presumably had
fuel availability issues They are thus assumed to be Last Resort
Users If the LPG price falls between the subsidized and black market
price of kerosene households are assumed to be Economy Users
The real income loss ΔI caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price Δ pk for the two groups
Last Resort Users (No Fuel Switch)
ΔI frac14 Q ksdot pkminusQ k 1 thorn Δ pksdot η k
sdot pk 1 thorn Δ pketh THORN eth1THORN
Economy Users (Switch to LPG)
ΔI frac14 Q ksdot pkminusQ LPGsdot 1 thorn Δ pksdot η klPG
sdot pLPG eth2THORN
where η k is the own-price elasticity for kerosene demand η kLPG is
the cross-price elasticity of LPG to a change in kerosene price Q k
and pk are the original quantity and price of kerosene and Q LPG
and pLPGare the original quantity and price of LPG (all in energy
units) Note that kerosene demand is inelastic for last resort
users since cooking is an essential function However to allow
for some conservation a sensitivity analysis incorporates elasticity
16 This estimate is based on each family member bathing every day each using 10 li-
ters of hot water heated from 10 degrees C to 70 degrees C and with savings of Rs 025
per megajoule of delivered energy from using kerosene instead of LPG
Note Cooking use assessed as household use above 4 liters per month
Source National Sample Survey of Consumption Expenditure 2004-05
Fig 4 Kerosene use for cookingwater heating mdash Maharashtra 2004ndash05
Fig 5 Kerosene vs LPG delivered fuel cost comparison (2004ndash05 prices)
39ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 29Electronic copy available at httpssrncomabstract=2047018
have contributed 23 of the 72 billion l of kerosene consumed in
Indian households in 2004ndash05 which amounts to about 15 of total
consumption in rural areas and 44 of kerosene consumption in
urban areas
Subsidized kerosene is distributed across the country through the
Public Distribution System (PDS) which consists of over 460000 pri-
vate licensed retailers who sell subsidized grains and kerosene In
contrast with LPG and subsidized grains which are sold in ldquodualrdquo
markets ndash
one subsidized and the other an open market ndash
keroseneis sold only through the PDS (ldquoPDS kerosenerdquo) However PDS kero-
sene is leaked to black markets through well-established channels
in the distribution chain where it is sold to households at higher
prices or as an adulterant to automotive fuels In Maharashtra the
site of this study these distribution channels are often controlled by
organized crime syndicates3
The Kirit Parikh expert committee recommendation to reduce
kerosene subsidies is justi1047297ed in part from their 1047297nding that the in-
come shocks on poor households on average would be fairly small
(Parikh 2010) Their recommendation rests largely on the premise
that kerosene is used primarily for lighting in rural areas However
these averages mask the distribution of bene1047297ts particularly to the
41 million households who cook with kerosene and therefore use
larger quantities Though kerosene subsidies in India are known to
be poorly targeted due to these diversions their distributional bene-
1047297ts are not well understood (Gangopadyaya et al 2005 Morris
et al 2006)
In this paper I formally examine the performance of the kerosene
subsidy as an instrument of redistribution using several measures I
evaluate the subsidys materiality (how does the energy budget
change with its removal) and its progressivity (do poor households
bene1047297t more than the average household) For purposes of compari-
son with other redistributive policies I assess ef 1047297cacy (what share
of the total subsidy value goes to poor households not counting
indirect impacts4) Among the novelties of this study is that I explore
the distinction between implementation failures and design limita-
tions and evaluate the subsidy bene1047297ts under ideal implementation
conditions This is also the 1047297rst use of ef 1047297cacy metric in terms of
subsidy value rather than quantity This study highlights an underem-phasized feature of kerosenes use as a cooking fuel in urban areas
The study does not consider recycling of government revenues from
removing subsidies that may offset the income shocks such as
through other redistributive schemes (eg food stamps) Thus the
absolute impact on energy budgets may be considered an upper
bound The focus of this study is the relative impacts on different
types of households
Previous literature
As mentioned several studies examine the macroeconomic costs
of energy subsidies in developing countries On the bene1047297t side the
World Bank 1047297nds that in general quantity-based utility subsidies
tend to be regressive because their use increases with income(Komives et al 2005) However this principle does not apply to ker-
osene whose use does not correlate well with income particularly
when considering its use for cooking This makes its distributional
bene1047297ts more dif 1047297cult to predict Many case studies in various devel-
oping countries examine the income bene1047297ts or the progressivity of
household fuel subsidies (Dube 2003 Gangopadyaya et al 2005
Hosier and Kipondya 1993 Kebede 2006 Komives et al 2005
Morris et al 2006 Olivia and John 2008 Pitt 1985) Among these
studies that examine kerosene generally 1047297nd that kerosene subsidies
provide income bene1047297ts to the poor and that kerosene use tends to
1047297rst increase and then decrease with income
The high 1047297scal and environmental costs of household fuel subsi-
dies in India have been well documented in the above cited studies
Economists estimate that kerosene subsidies in particular cost
the government $4ndash6 billion per year and carry ef 1047297ciency losses5 of
$1ndash2 billion per year (IEA 1999 Morris et al 2006) It is well
known that suppliers and distributors divert 40ndash66 of kerosene allo-
cated for states to other lucrative markets such as transportation
6
forcing some households to purchase kerosene in the black market
(NCAER 2005 Shelar et al 2007) But the 1047297nancial impacts of
the subsidies that do reach households are not formally estimated
One study of fuel taxation in India 1047297nds that the direct income bene-
1047297ts from household kerosene use are progressive (Datta 2010) How-
ever the study offers limited detail on underlying regional differences
and causes Further progressivity alone may not justify public spend-
ing on kerosene subsidies Subsidies may be regressive but still
provide substantial income relief to the poor Conversely even if ker-
osene subsidies are progressive other less progressive redistributive
policies may have higher impacts on poverty and cost less to deliver
The ef 1047297cacy measure used in this study provides a metric for such a
comparison across policies
Many studies illustrate the inappropriateness of encouraging ker-
osene use for lighting but no study critiques the subsidy for cooking
use Many studies have pointed out that kerosene lamps are the
most expensive and inef 1047297cient form of lighting (Dutt and Mills
1994 Mahapatra et al 2009 Reddy 1981) Rehman Malhotra et al
(2005) have pointed out that rural kerosene quotas are based on
cooking but used only for lighting However subsidy quotas may be
better suited to urban kerosene use for cooking In this study I assess
the contribution of design and implementation failures to targeting
ef 1047297cacy of kerosene subsidies in urban and rural areas
This study relies on data from the National Sample Survey of India
for Consumption Expenditure 2004ndash05 (NSSO0405) and draws qual-
itative insights from a primary survey I had conducted of 450 house-
holds in urban and peri-urban parts of Maharashtra in 20092010
(ldquoprimary surveyrdquo)
In Section 2 I describe the various uses for kerosene in differenthousehold in Maharashtra and how these functions in1047298uence the
subsidys relative bene1047297ts In Section 3 I discuss the measurement
approach and the results of the subsidy performance analysis In
Section 4 I discuss the subsidy performance under ideal implemen-
tation conditions I close with some policy recommendations in
Section 5
Kerosene market and use characteristics in Maharashtra
In Maharashtra 70 of households (68 million people) use
kerosene Of these about 50 million users are in rural areas (91 of
the rural population) and 18 million are in urban areas (49 of the
urban population)Urban use of kerosene is higher in Maharashtra than in the rest of
the country and even more so in the vast slums of metropolitan
Mumbai (Fig 1) The average kerosene consumption among house-
holds earning less than Rs 4000 per month (or $250 PPP) in urban
Mumbai was over 10 l per month As a result though 26 of kerosene
users in Maharashtra are in urban areas they consume 45 of total
household kerosene use in the state
3 See lsquoMaharashtra Cracks Down on Oil Ma1047297arsquo Hindu Business Line January 28 20114 Kerosene that is diverted to automobile and other markets have income distribu-
tional impacts as well such as the rents earned by middlemen or the marginal pro1047297ts
earned by bene1047297ciaries of adulterated fuel Data on these diversions are unavailable
5 Ef 1047297ciency losses refer to reduced aggregate income from the misallocation of in-
vestments in response to price signals that do not re 1047298ect actual costs In economic jar-
gon this is calculated as the lsquodead weight lossesrsquo that result from pricing below
marginal cost6 In transportation kerosene is used to adulterate gasoline and diesel In construc-
tion kerosene is used in making tar for paving roads
36 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 39
Kerosene is used widely across income groups This is in contrast
to LPG which is a preferred cooking fuel and whose use correlates
well with income as shown in Fig 2 One reason for this is that
kerosene is often used as a backup cooking fuel to LPG and biomass
to meet gaps in supply availability which does not necessarily
depend on income
Two underemphasizedcharacteristics of kerosene use in households
are important in understanding the bene1047297t incidence of subsidies
actual kerosene market prices and kerosenes use as a cooking fuel
These are discussed next along with how they affect subsidy bene1047297ts
Kerosene markets
Households are supposed to purchase all their household kero-
sene needs through the Public Distribution System (PDS) To use the
PDS households register their household characteristics on ration
cards which indicate various eligibility criteria on the basis of
which each households quota is calculated and in turn each ration
shops aggregate quota is calculated based on the households allotted
to each shop However households in Maharashtra purchase over
40 and in urban areas over 50 of their consumption from second-
ary (black) markets (Table 1)For kerosene unlike other subsidized products householdsrsquo quotas
are de1047297ned based on their assumed reliance on kerosene for cooking
and not on their poverty status7 Lighting needs are not included in
the design of the quota The quota criteria include two household
characteristics the number of LPG cylinders8 and household size
(See Appendix A) Households with two cylinders are not entitled to
kerosene Households with one cylinder are entitled to 4 l per month
The quota of households without any LPG cylinders increases with
family size up to a maximum of 15 l for most areas or 24 l in particular
urban areas Both criteria however weakly correlate to income Lower
income households tend to have fewer LPG cylinders and larger fami-
lies Thus in principle the kerosene subsidy does have the potential to
serve as a redistributive instrument but an imperfect one
About 130 million l were allocated on a monthly basis to rationshops in 2004ndash05 of which about 129 million l on average were
claimed for distribution9 A bottom-up aggregation of household
quotas from NSSO0405 indicates that 118 million l ought to have
been allocated The discrepancy may re1047298ect a margin of error from
using a sample survey to determine householdsrsquo eligibility criteria10
and the likely mismatch between households actual and recorded
eligibility Regardless as mentioned earlier a large share of this allo-cation is diverted upstream to third parties who sell kerosene to other
markets and to households in the black market As a result based on
an aggregation of the sample in NSSO0405 only 40 million l of the
118 million l of subsidized kerosene were purchased by households
through the PDS and only 68 million l consumed by households
Notably in rural areas the quota (80 million l) is more than double
actual consumption including black market purchases (37 million l)
This mismatch between the quota and actual demand encourages
kerosenes diversion to other markets
While this quantity diversion is well understood the prices in
these markets have not been analyzed in literature The market prices
for kerosene vary widely but on average are double that of PDS ker-
osene These prices are the lowest alternate price most households
would face should kerosene subsidies be lifted11
More importantlythe PDS kerosene price that households actually pay also varies
widely but only to a minority of households (Fig 3)
About 56 million people in Maharashtra (13 of PDS kerosene
users) bought PDS kerosene at above Rs 12l (higher than the highest
intended price including transport and pro1047297t) in 2004ndash05 In many
districts prices are as much as double the wholesale rate
Fig 1 Variation in urban household kerosene use mdash Mumbai Maharashtra and India
2004ndash05
a) Rural
b) Urban
Source National Sample Survey of Consumption Expenditure 2004-05
Note Kerosene use below 4 liters is assumed to be for lighting
Fig 2 Cooking fuel shares by income decile mdash Maharashtra 2004ndash05
7 Ration cards are issued to citizens of India which delineate broad categories of an-
nual income for households yellow (bRs 15000 below poverty line) saffron (Rs
15000-Rs 100000) and white (gtRs 100000) Food subsidy quotas are allocated based
on these categories8 Households purchase LPG in cylinders that typically contain 142 kg of LPG House-
holds pay a deposit to get a cylinder then subsequently buy re1047297lls by swapping out
empty cylinders for full ones Households face delays in receiving re1047297lls Thus house-
holds that can afford two cylinders have a reliable supply9
lsquoState-wise Superior Kerosene Oil (SKO) Allocated under Public Distribution Sys-
tem (PDS) in India mdash 2004ndash5 to 2007ndash8 and lsquoState-wise Superior Kerosene Oil (SKO)
Uplifted under Public Distribution System (PDS) in India mdash 2004ndash5 to 2007ndash8 IndiaS-
tatcom These allocations and claimed 1047297gures have remained fairly constant in the
time period covered by the data source
10 See Appendix A for how the household quota was inferred from sample survey
data11 Theoretically one would expect that black market prices would be set by the prices
of fuels that they substitute in other markets namely diesel In reality black market
prices are lower and vary by region due to market imperfections Data on black mar-
ket prices are available in NSSO0405 in household surveys as the price of lsquootherrsquo kero-
sene purchases made outside the PDS
37ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 49
Kerosene as Primary Cooking Fuel in Urban Households
A neglected fact in subsidy analysis is that many urban households
rely exclusively on kerosene as a cooking fuel In Maharashtra about
12 of urban households (1 million households 45 million people)
fall into this category In my primary survey 33 (of 450) households
all slum dwellers who did not have access to wood and who stated
they could not afford LPG cooked exclusively with kerosene These
circumstances may be commonplace among the urban poor across
India particularly in large metropolitan areas
These households on average use more kerosene than all keroseneusers and therefore stand to bene1047297t the most from kerosene subsidies
Kerosene use as secondary cooking fuel
Even though the vast majority of rural households do use kerosene
primarily for lighting kerosene use as a secondary cooking fuel is
widespread (See Table 2)
In urban Maharashtra 10 million out of 18 million kerosene users
use it as a secondary cooking fuel As mentioned Maharashtras house-
hold quota allocation scheme is indeed based on household cooking
needs This group of households not only would consume more
kerosene than lighting users but a subset of them might also pay a dif-
ferent replacement price in the absence of subsidies namely LPG prices
The distribution across income groups of kerosene use as a
cooking fuel also varies between urban and rural areas (Fig 4)
These patterns are explained by their relative reliance on LPG
which is more closely tied to kerosene usage In rural areas kerosene
use increases with income since LPG use increases with income
Among poorer households kerosene is used as a backup to wood
albeit to a lesser extent when wood is unavailable (such as during
monsoon) or too expensive (where purchased)
In contrast in urban areas such secondary use is highest among
lower and middle income groups but then decreases with income
at the highest income levels as more households have two LPG cylin-ders or piped gas supply
Drivers of kerosene use as a secondary cooking fuel
An important feature of kerosenes secondary use is that it is driven
not only by unreliable supply of households rsquo primary fuel but also by
the desire to save fuel costs Households for which kerosene is cheaper
than LPG on a useful energy basis (ldquoEconomy Usersrdquo) use kerosene re-
gardless of LPG availability12 Based on a heuristic to identify Economy
Users (discussed in Section 3) there are about 4 million such users in
Maharashtra One indication of this phenomenon is that a large number
of households use different fuels for cooking and for water heating re-
gardless of their supply conditions13 For example in the primary sur-
vey 60 of all households and almost all low-income households usedifferent fuels for cooking and water heating respectively regardless
of their primary fuel Many low-income urban households particularly
in Mumbai use LPG for cooking and kerosene for water heating
The importance of the distinction between Economy Users and those
using kerosene due to insuf 1047297cient LPG supply (ldquoLast Resort Usersrdquo) is
that the former bene1047297t less from subsidies since they can switch back
to LPG if cooking with kerosene becomes more expensive14 Note that
some low-income households who use kerosene because they would
otherwisepay more forusing wood may switch back to wood if kerosene
subsidies are removed However in Maharashtra this group was found
to be negligibly small and was therefore omitted from the analysis15
It would seem that the margin of subsidy bene1047297ts for Economy
Users is small For these households the economics of cooking with
LPG and kerosene depend on their relative energy (rather than lifecycle) costs since these households already own an LPG range and
kerosene stove (Fig 5) A rough calculation of the energy used for
heating bath water shows that the total savings from using subsidized
kerosene in comparison to subsidized LPG may be up to Rs 30 per
a) Subsidy Prices
b) Black Market Prices
Source National Sample Survey 2004-05 Sales prices shown for all retail sellers in the state
Fig 3 PDS kerosene prices by quantity sold mdash
Maharashtra 2004ndash
05
Table 1
Kerosene consumption by market Maharashtra 2004ndash05
Monthly
million liters
HH quota
total
HH PDS
purchase
HH black market
purchase
Diversions to
other markets
Rural 80 25 12 42
Urban 38 15 16 7
Totals 118 40 28 50
Source for PDS and black market purchases National Sample Survey Consumption
Expenditure 2004ndash5
See Appendix A for details on quota estimation
Numbers dont add due to rounding
Table 2
Household kerosene use by function region and priority in Maharashtra
Million users Lighting Cooking
Primary 122 (R) 13 (U) b01 (R) 45 (U)
Secondarya NAb gt170 (R) gt100 (U)
Source National Sample Survey of Consumption Expenditure 2004-05a Secondary use for cooking estimated as households with LPG or wood use and
gt4 lmonth of keroseneb The purpose of kerosene use up to 4 l cannot be inferred from NSSO data
12 A numberof otherfactors in1047298uence households cookingfuel choicesother thanfu-
el economy otherwise lsquoEconomy Usersrsquo would not use LPG at all Non-economic prefer-
ences for cooking fuel are a rich and underexplored topic in literature that merits
further research13 This was observed in the household survey14 The heat content of the fuels and their stoves ef 1047297ciencies determine their cost in
energy terms given fuel prices15 Wood was found to be more expensive than PDS kerosene on an energy basis for
only about 230000 households There may be some others who do not show wood
use in the survey but have wood stoves but there is no way to identify this group from
NSSO data
38 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 59
month for a family of seven 16 This is less than a half a percent of poor
householdsrsquo monthly expenditure Such households may overesti-
mate these savings or consider even such small savings worthwhile
Households that cook with black-market kerosene pay approxi-
mately the same fuel price as LPG (about Rs 22kg on average in
urban Maharashtra) which implies they pay more on an energy basis
than they do to cook with LPG (since kerosene stoves are less ef 1047297cient)
This suggests thatLPG users whobuy black marketkerosene forcooking
must also be Last Resort Users who lack reliable access to LPG
In summary Economy Users may represent a minority of kerosene
users However the 1047297nancial risk to them of removing subsidies is
signi1047297cantly less than others given the thin margins of savings from
using subsidized kerosene over LPG To the extent possible differen-
tiating these households would be important in calculating the distri-
bution of subsidy bene1047297ts
Assessment of subsidy performance
In this section I discuss the merits of kerosene subsidies as a redis-
tributive policy based on three measures materiality progressivity
and ef 1047297cacy I 1047297rst present the measurement approach and metrics
I then discuss the results and the drivers of low ef 1047297cacy
Measurement approach
I 1047297rst present the method for calculating individual household
bene1047297ts in terms of budget share based on the categorization of
kerosene users discussed in the previous section Based on these
budget shares I estimate progressivity and ef 1047297cacy
Several approaches have been used to assess the distributional
bene1047297ts of subsidies to households in other developing countries Acommon approach is to compare energy budgets with and without
the subsidy (Dube 2003 Kebede 2006) for different types of house-
holds I use a similar approach to estimating materiality Dube (2003)
compares households willingness to pay to the price they would pay
without subsidies However this carries a hypothetical bias Instead I
use market prices for substitutes to evaluate budget impacts Saboohi
(2001) calculates Lorenz curves for energy subsidy bene1047297ts to assess
progressivity Olivia and Gibson (2008) use an aggregate welfare
measure that incorporates an inequality aversion parameter Both
approaches capture equity in terms of inequality but not necessarily
poverty impact In order to capture the subsidy bene1047297ts around an
absolute poverty threshold I use a Growth Incidence Curve as de-
scribed below
Previous studies that quantify the impact of subsidy diversions in
India focus on the quantity of subsidized kerosene that households
actually receive I also account for the actual PDS kerosene price
paid by households which varies signi1047297cantly around the intended
subsidized price
Materiality
The value to households of the subsidy is a reduction in energy
expenditure which enables more discretionary spending on other
goods In contrast to prior studies that focus on mean bene1047297t inci-
dence for households in an income decile I calculate the bene1047297t for
different types of households based on fuel choices which affects
the price they would pay with the subsidys removal In particular
Economy Users would switch to LPG while Last Resort would be
forced to continue using kerosene and pay black market prices
Identifying Economy Users required a heuristic in the absence
of data on LPG reliability Note that all households fall into the 1047297rstcategory (including primary cookinglighting users) except for
those select LPG users whose cost of using subsidized kerosene is
less than that of LPG in energy terms The prevailing relative prices
of LPG and kerosene for a household were used as proxies to identify
this group If households used kerosene as a supplemental fuel even
when LPG was cheaper on an energy basis they presumably had
fuel availability issues They are thus assumed to be Last Resort
Users If the LPG price falls between the subsidized and black market
price of kerosene households are assumed to be Economy Users
The real income loss ΔI caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price Δ pk for the two groups
Last Resort Users (No Fuel Switch)
ΔI frac14 Q ksdot pkminusQ k 1 thorn Δ pksdot η k
sdot pk 1 thorn Δ pketh THORN eth1THORN
Economy Users (Switch to LPG)
ΔI frac14 Q ksdot pkminusQ LPGsdot 1 thorn Δ pksdot η klPG
sdot pLPG eth2THORN
where η k is the own-price elasticity for kerosene demand η kLPG is
the cross-price elasticity of LPG to a change in kerosene price Q k
and pk are the original quantity and price of kerosene and Q LPG
and pLPGare the original quantity and price of LPG (all in energy
units) Note that kerosene demand is inelastic for last resort
users since cooking is an essential function However to allow
for some conservation a sensitivity analysis incorporates elasticity
16 This estimate is based on each family member bathing every day each using 10 li-
ters of hot water heated from 10 degrees C to 70 degrees C and with savings of Rs 025
per megajoule of delivered energy from using kerosene instead of LPG
Note Cooking use assessed as household use above 4 liters per month
Source National Sample Survey of Consumption Expenditure 2004-05
Fig 4 Kerosene use for cookingwater heating mdash Maharashtra 2004ndash05
Fig 5 Kerosene vs LPG delivered fuel cost comparison (2004ndash05 prices)
39ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 39
Kerosene is used widely across income groups This is in contrast
to LPG which is a preferred cooking fuel and whose use correlates
well with income as shown in Fig 2 One reason for this is that
kerosene is often used as a backup cooking fuel to LPG and biomass
to meet gaps in supply availability which does not necessarily
depend on income
Two underemphasizedcharacteristics of kerosene use in households
are important in understanding the bene1047297t incidence of subsidies
actual kerosene market prices and kerosenes use as a cooking fuel
These are discussed next along with how they affect subsidy bene1047297ts
Kerosene markets
Households are supposed to purchase all their household kero-
sene needs through the Public Distribution System (PDS) To use the
PDS households register their household characteristics on ration
cards which indicate various eligibility criteria on the basis of
which each households quota is calculated and in turn each ration
shops aggregate quota is calculated based on the households allotted
to each shop However households in Maharashtra purchase over
40 and in urban areas over 50 of their consumption from second-
ary (black) markets (Table 1)For kerosene unlike other subsidized products householdsrsquo quotas
are de1047297ned based on their assumed reliance on kerosene for cooking
and not on their poverty status7 Lighting needs are not included in
the design of the quota The quota criteria include two household
characteristics the number of LPG cylinders8 and household size
(See Appendix A) Households with two cylinders are not entitled to
kerosene Households with one cylinder are entitled to 4 l per month
The quota of households without any LPG cylinders increases with
family size up to a maximum of 15 l for most areas or 24 l in particular
urban areas Both criteria however weakly correlate to income Lower
income households tend to have fewer LPG cylinders and larger fami-
lies Thus in principle the kerosene subsidy does have the potential to
serve as a redistributive instrument but an imperfect one
About 130 million l were allocated on a monthly basis to rationshops in 2004ndash05 of which about 129 million l on average were
claimed for distribution9 A bottom-up aggregation of household
quotas from NSSO0405 indicates that 118 million l ought to have
been allocated The discrepancy may re1047298ect a margin of error from
using a sample survey to determine householdsrsquo eligibility criteria10
and the likely mismatch between households actual and recorded
eligibility Regardless as mentioned earlier a large share of this allo-cation is diverted upstream to third parties who sell kerosene to other
markets and to households in the black market As a result based on
an aggregation of the sample in NSSO0405 only 40 million l of the
118 million l of subsidized kerosene were purchased by households
through the PDS and only 68 million l consumed by households
Notably in rural areas the quota (80 million l) is more than double
actual consumption including black market purchases (37 million l)
This mismatch between the quota and actual demand encourages
kerosenes diversion to other markets
While this quantity diversion is well understood the prices in
these markets have not been analyzed in literature The market prices
for kerosene vary widely but on average are double that of PDS ker-
osene These prices are the lowest alternate price most households
would face should kerosene subsidies be lifted11
More importantlythe PDS kerosene price that households actually pay also varies
widely but only to a minority of households (Fig 3)
About 56 million people in Maharashtra (13 of PDS kerosene
users) bought PDS kerosene at above Rs 12l (higher than the highest
intended price including transport and pro1047297t) in 2004ndash05 In many
districts prices are as much as double the wholesale rate
Fig 1 Variation in urban household kerosene use mdash Mumbai Maharashtra and India
2004ndash05
a) Rural
b) Urban
Source National Sample Survey of Consumption Expenditure 2004-05
Note Kerosene use below 4 liters is assumed to be for lighting
Fig 2 Cooking fuel shares by income decile mdash Maharashtra 2004ndash05
7 Ration cards are issued to citizens of India which delineate broad categories of an-
nual income for households yellow (bRs 15000 below poverty line) saffron (Rs
15000-Rs 100000) and white (gtRs 100000) Food subsidy quotas are allocated based
on these categories8 Households purchase LPG in cylinders that typically contain 142 kg of LPG House-
holds pay a deposit to get a cylinder then subsequently buy re1047297lls by swapping out
empty cylinders for full ones Households face delays in receiving re1047297lls Thus house-
holds that can afford two cylinders have a reliable supply9
lsquoState-wise Superior Kerosene Oil (SKO) Allocated under Public Distribution Sys-
tem (PDS) in India mdash 2004ndash5 to 2007ndash8 and lsquoState-wise Superior Kerosene Oil (SKO)
Uplifted under Public Distribution System (PDS) in India mdash 2004ndash5 to 2007ndash8 IndiaS-
tatcom These allocations and claimed 1047297gures have remained fairly constant in the
time period covered by the data source
10 See Appendix A for how the household quota was inferred from sample survey
data11 Theoretically one would expect that black market prices would be set by the prices
of fuels that they substitute in other markets namely diesel In reality black market
prices are lower and vary by region due to market imperfections Data on black mar-
ket prices are available in NSSO0405 in household surveys as the price of lsquootherrsquo kero-
sene purchases made outside the PDS
37ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 49
Kerosene as Primary Cooking Fuel in Urban Households
A neglected fact in subsidy analysis is that many urban households
rely exclusively on kerosene as a cooking fuel In Maharashtra about
12 of urban households (1 million households 45 million people)
fall into this category In my primary survey 33 (of 450) households
all slum dwellers who did not have access to wood and who stated
they could not afford LPG cooked exclusively with kerosene These
circumstances may be commonplace among the urban poor across
India particularly in large metropolitan areas
These households on average use more kerosene than all keroseneusers and therefore stand to bene1047297t the most from kerosene subsidies
Kerosene use as secondary cooking fuel
Even though the vast majority of rural households do use kerosene
primarily for lighting kerosene use as a secondary cooking fuel is
widespread (See Table 2)
In urban Maharashtra 10 million out of 18 million kerosene users
use it as a secondary cooking fuel As mentioned Maharashtras house-
hold quota allocation scheme is indeed based on household cooking
needs This group of households not only would consume more
kerosene than lighting users but a subset of them might also pay a dif-
ferent replacement price in the absence of subsidies namely LPG prices
The distribution across income groups of kerosene use as a
cooking fuel also varies between urban and rural areas (Fig 4)
These patterns are explained by their relative reliance on LPG
which is more closely tied to kerosene usage In rural areas kerosene
use increases with income since LPG use increases with income
Among poorer households kerosene is used as a backup to wood
albeit to a lesser extent when wood is unavailable (such as during
monsoon) or too expensive (where purchased)
In contrast in urban areas such secondary use is highest among
lower and middle income groups but then decreases with income
at the highest income levels as more households have two LPG cylin-ders or piped gas supply
Drivers of kerosene use as a secondary cooking fuel
An important feature of kerosenes secondary use is that it is driven
not only by unreliable supply of households rsquo primary fuel but also by
the desire to save fuel costs Households for which kerosene is cheaper
than LPG on a useful energy basis (ldquoEconomy Usersrdquo) use kerosene re-
gardless of LPG availability12 Based on a heuristic to identify Economy
Users (discussed in Section 3) there are about 4 million such users in
Maharashtra One indication of this phenomenon is that a large number
of households use different fuels for cooking and for water heating re-
gardless of their supply conditions13 For example in the primary sur-
vey 60 of all households and almost all low-income households usedifferent fuels for cooking and water heating respectively regardless
of their primary fuel Many low-income urban households particularly
in Mumbai use LPG for cooking and kerosene for water heating
The importance of the distinction between Economy Users and those
using kerosene due to insuf 1047297cient LPG supply (ldquoLast Resort Usersrdquo) is
that the former bene1047297t less from subsidies since they can switch back
to LPG if cooking with kerosene becomes more expensive14 Note that
some low-income households who use kerosene because they would
otherwisepay more forusing wood may switch back to wood if kerosene
subsidies are removed However in Maharashtra this group was found
to be negligibly small and was therefore omitted from the analysis15
It would seem that the margin of subsidy bene1047297ts for Economy
Users is small For these households the economics of cooking with
LPG and kerosene depend on their relative energy (rather than lifecycle) costs since these households already own an LPG range and
kerosene stove (Fig 5) A rough calculation of the energy used for
heating bath water shows that the total savings from using subsidized
kerosene in comparison to subsidized LPG may be up to Rs 30 per
a) Subsidy Prices
b) Black Market Prices
Source National Sample Survey 2004-05 Sales prices shown for all retail sellers in the state
Fig 3 PDS kerosene prices by quantity sold mdash
Maharashtra 2004ndash
05
Table 1
Kerosene consumption by market Maharashtra 2004ndash05
Monthly
million liters
HH quota
total
HH PDS
purchase
HH black market
purchase
Diversions to
other markets
Rural 80 25 12 42
Urban 38 15 16 7
Totals 118 40 28 50
Source for PDS and black market purchases National Sample Survey Consumption
Expenditure 2004ndash5
See Appendix A for details on quota estimation
Numbers dont add due to rounding
Table 2
Household kerosene use by function region and priority in Maharashtra
Million users Lighting Cooking
Primary 122 (R) 13 (U) b01 (R) 45 (U)
Secondarya NAb gt170 (R) gt100 (U)
Source National Sample Survey of Consumption Expenditure 2004-05a Secondary use for cooking estimated as households with LPG or wood use and
gt4 lmonth of keroseneb The purpose of kerosene use up to 4 l cannot be inferred from NSSO data
12 A numberof otherfactors in1047298uence households cookingfuel choicesother thanfu-
el economy otherwise lsquoEconomy Usersrsquo would not use LPG at all Non-economic prefer-
ences for cooking fuel are a rich and underexplored topic in literature that merits
further research13 This was observed in the household survey14 The heat content of the fuels and their stoves ef 1047297ciencies determine their cost in
energy terms given fuel prices15 Wood was found to be more expensive than PDS kerosene on an energy basis for
only about 230000 households There may be some others who do not show wood
use in the survey but have wood stoves but there is no way to identify this group from
NSSO data
38 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 59
month for a family of seven 16 This is less than a half a percent of poor
householdsrsquo monthly expenditure Such households may overesti-
mate these savings or consider even such small savings worthwhile
Households that cook with black-market kerosene pay approxi-
mately the same fuel price as LPG (about Rs 22kg on average in
urban Maharashtra) which implies they pay more on an energy basis
than they do to cook with LPG (since kerosene stoves are less ef 1047297cient)
This suggests thatLPG users whobuy black marketkerosene forcooking
must also be Last Resort Users who lack reliable access to LPG
In summary Economy Users may represent a minority of kerosene
users However the 1047297nancial risk to them of removing subsidies is
signi1047297cantly less than others given the thin margins of savings from
using subsidized kerosene over LPG To the extent possible differen-
tiating these households would be important in calculating the distri-
bution of subsidy bene1047297ts
Assessment of subsidy performance
In this section I discuss the merits of kerosene subsidies as a redis-
tributive policy based on three measures materiality progressivity
and ef 1047297cacy I 1047297rst present the measurement approach and metrics
I then discuss the results and the drivers of low ef 1047297cacy
Measurement approach
I 1047297rst present the method for calculating individual household
bene1047297ts in terms of budget share based on the categorization of
kerosene users discussed in the previous section Based on these
budget shares I estimate progressivity and ef 1047297cacy
Several approaches have been used to assess the distributional
bene1047297ts of subsidies to households in other developing countries Acommon approach is to compare energy budgets with and without
the subsidy (Dube 2003 Kebede 2006) for different types of house-
holds I use a similar approach to estimating materiality Dube (2003)
compares households willingness to pay to the price they would pay
without subsidies However this carries a hypothetical bias Instead I
use market prices for substitutes to evaluate budget impacts Saboohi
(2001) calculates Lorenz curves for energy subsidy bene1047297ts to assess
progressivity Olivia and Gibson (2008) use an aggregate welfare
measure that incorporates an inequality aversion parameter Both
approaches capture equity in terms of inequality but not necessarily
poverty impact In order to capture the subsidy bene1047297ts around an
absolute poverty threshold I use a Growth Incidence Curve as de-
scribed below
Previous studies that quantify the impact of subsidy diversions in
India focus on the quantity of subsidized kerosene that households
actually receive I also account for the actual PDS kerosene price
paid by households which varies signi1047297cantly around the intended
subsidized price
Materiality
The value to households of the subsidy is a reduction in energy
expenditure which enables more discretionary spending on other
goods In contrast to prior studies that focus on mean bene1047297t inci-
dence for households in an income decile I calculate the bene1047297t for
different types of households based on fuel choices which affects
the price they would pay with the subsidys removal In particular
Economy Users would switch to LPG while Last Resort would be
forced to continue using kerosene and pay black market prices
Identifying Economy Users required a heuristic in the absence
of data on LPG reliability Note that all households fall into the 1047297rstcategory (including primary cookinglighting users) except for
those select LPG users whose cost of using subsidized kerosene is
less than that of LPG in energy terms The prevailing relative prices
of LPG and kerosene for a household were used as proxies to identify
this group If households used kerosene as a supplemental fuel even
when LPG was cheaper on an energy basis they presumably had
fuel availability issues They are thus assumed to be Last Resort
Users If the LPG price falls between the subsidized and black market
price of kerosene households are assumed to be Economy Users
The real income loss ΔI caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price Δ pk for the two groups
Last Resort Users (No Fuel Switch)
ΔI frac14 Q ksdot pkminusQ k 1 thorn Δ pksdot η k
sdot pk 1 thorn Δ pketh THORN eth1THORN
Economy Users (Switch to LPG)
ΔI frac14 Q ksdot pkminusQ LPGsdot 1 thorn Δ pksdot η klPG
sdot pLPG eth2THORN
where η k is the own-price elasticity for kerosene demand η kLPG is
the cross-price elasticity of LPG to a change in kerosene price Q k
and pk are the original quantity and price of kerosene and Q LPG
and pLPGare the original quantity and price of LPG (all in energy
units) Note that kerosene demand is inelastic for last resort
users since cooking is an essential function However to allow
for some conservation a sensitivity analysis incorporates elasticity
16 This estimate is based on each family member bathing every day each using 10 li-
ters of hot water heated from 10 degrees C to 70 degrees C and with savings of Rs 025
per megajoule of delivered energy from using kerosene instead of LPG
Note Cooking use assessed as household use above 4 liters per month
Source National Sample Survey of Consumption Expenditure 2004-05
Fig 4 Kerosene use for cookingwater heating mdash Maharashtra 2004ndash05
Fig 5 Kerosene vs LPG delivered fuel cost comparison (2004ndash05 prices)
39ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 49
Kerosene as Primary Cooking Fuel in Urban Households
A neglected fact in subsidy analysis is that many urban households
rely exclusively on kerosene as a cooking fuel In Maharashtra about
12 of urban households (1 million households 45 million people)
fall into this category In my primary survey 33 (of 450) households
all slum dwellers who did not have access to wood and who stated
they could not afford LPG cooked exclusively with kerosene These
circumstances may be commonplace among the urban poor across
India particularly in large metropolitan areas
These households on average use more kerosene than all keroseneusers and therefore stand to bene1047297t the most from kerosene subsidies
Kerosene use as secondary cooking fuel
Even though the vast majority of rural households do use kerosene
primarily for lighting kerosene use as a secondary cooking fuel is
widespread (See Table 2)
In urban Maharashtra 10 million out of 18 million kerosene users
use it as a secondary cooking fuel As mentioned Maharashtras house-
hold quota allocation scheme is indeed based on household cooking
needs This group of households not only would consume more
kerosene than lighting users but a subset of them might also pay a dif-
ferent replacement price in the absence of subsidies namely LPG prices
The distribution across income groups of kerosene use as a
cooking fuel also varies between urban and rural areas (Fig 4)
These patterns are explained by their relative reliance on LPG
which is more closely tied to kerosene usage In rural areas kerosene
use increases with income since LPG use increases with income
Among poorer households kerosene is used as a backup to wood
albeit to a lesser extent when wood is unavailable (such as during
monsoon) or too expensive (where purchased)
In contrast in urban areas such secondary use is highest among
lower and middle income groups but then decreases with income
at the highest income levels as more households have two LPG cylin-ders or piped gas supply
Drivers of kerosene use as a secondary cooking fuel
An important feature of kerosenes secondary use is that it is driven
not only by unreliable supply of households rsquo primary fuel but also by
the desire to save fuel costs Households for which kerosene is cheaper
than LPG on a useful energy basis (ldquoEconomy Usersrdquo) use kerosene re-
gardless of LPG availability12 Based on a heuristic to identify Economy
Users (discussed in Section 3) there are about 4 million such users in
Maharashtra One indication of this phenomenon is that a large number
of households use different fuels for cooking and for water heating re-
gardless of their supply conditions13 For example in the primary sur-
vey 60 of all households and almost all low-income households usedifferent fuels for cooking and water heating respectively regardless
of their primary fuel Many low-income urban households particularly
in Mumbai use LPG for cooking and kerosene for water heating
The importance of the distinction between Economy Users and those
using kerosene due to insuf 1047297cient LPG supply (ldquoLast Resort Usersrdquo) is
that the former bene1047297t less from subsidies since they can switch back
to LPG if cooking with kerosene becomes more expensive14 Note that
some low-income households who use kerosene because they would
otherwisepay more forusing wood may switch back to wood if kerosene
subsidies are removed However in Maharashtra this group was found
to be negligibly small and was therefore omitted from the analysis15
It would seem that the margin of subsidy bene1047297ts for Economy
Users is small For these households the economics of cooking with
LPG and kerosene depend on their relative energy (rather than lifecycle) costs since these households already own an LPG range and
kerosene stove (Fig 5) A rough calculation of the energy used for
heating bath water shows that the total savings from using subsidized
kerosene in comparison to subsidized LPG may be up to Rs 30 per
a) Subsidy Prices
b) Black Market Prices
Source National Sample Survey 2004-05 Sales prices shown for all retail sellers in the state
Fig 3 PDS kerosene prices by quantity sold mdash
Maharashtra 2004ndash
05
Table 1
Kerosene consumption by market Maharashtra 2004ndash05
Monthly
million liters
HH quota
total
HH PDS
purchase
HH black market
purchase
Diversions to
other markets
Rural 80 25 12 42
Urban 38 15 16 7
Totals 118 40 28 50
Source for PDS and black market purchases National Sample Survey Consumption
Expenditure 2004ndash5
See Appendix A for details on quota estimation
Numbers dont add due to rounding
Table 2
Household kerosene use by function region and priority in Maharashtra
Million users Lighting Cooking
Primary 122 (R) 13 (U) b01 (R) 45 (U)
Secondarya NAb gt170 (R) gt100 (U)
Source National Sample Survey of Consumption Expenditure 2004-05a Secondary use for cooking estimated as households with LPG or wood use and
gt4 lmonth of keroseneb The purpose of kerosene use up to 4 l cannot be inferred from NSSO data
12 A numberof otherfactors in1047298uence households cookingfuel choicesother thanfu-
el economy otherwise lsquoEconomy Usersrsquo would not use LPG at all Non-economic prefer-
ences for cooking fuel are a rich and underexplored topic in literature that merits
further research13 This was observed in the household survey14 The heat content of the fuels and their stoves ef 1047297ciencies determine their cost in
energy terms given fuel prices15 Wood was found to be more expensive than PDS kerosene on an energy basis for
only about 230000 households There may be some others who do not show wood
use in the survey but have wood stoves but there is no way to identify this group from
NSSO data
38 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 59
month for a family of seven 16 This is less than a half a percent of poor
householdsrsquo monthly expenditure Such households may overesti-
mate these savings or consider even such small savings worthwhile
Households that cook with black-market kerosene pay approxi-
mately the same fuel price as LPG (about Rs 22kg on average in
urban Maharashtra) which implies they pay more on an energy basis
than they do to cook with LPG (since kerosene stoves are less ef 1047297cient)
This suggests thatLPG users whobuy black marketkerosene forcooking
must also be Last Resort Users who lack reliable access to LPG
In summary Economy Users may represent a minority of kerosene
users However the 1047297nancial risk to them of removing subsidies is
signi1047297cantly less than others given the thin margins of savings from
using subsidized kerosene over LPG To the extent possible differen-
tiating these households would be important in calculating the distri-
bution of subsidy bene1047297ts
Assessment of subsidy performance
In this section I discuss the merits of kerosene subsidies as a redis-
tributive policy based on three measures materiality progressivity
and ef 1047297cacy I 1047297rst present the measurement approach and metrics
I then discuss the results and the drivers of low ef 1047297cacy
Measurement approach
I 1047297rst present the method for calculating individual household
bene1047297ts in terms of budget share based on the categorization of
kerosene users discussed in the previous section Based on these
budget shares I estimate progressivity and ef 1047297cacy
Several approaches have been used to assess the distributional
bene1047297ts of subsidies to households in other developing countries Acommon approach is to compare energy budgets with and without
the subsidy (Dube 2003 Kebede 2006) for different types of house-
holds I use a similar approach to estimating materiality Dube (2003)
compares households willingness to pay to the price they would pay
without subsidies However this carries a hypothetical bias Instead I
use market prices for substitutes to evaluate budget impacts Saboohi
(2001) calculates Lorenz curves for energy subsidy bene1047297ts to assess
progressivity Olivia and Gibson (2008) use an aggregate welfare
measure that incorporates an inequality aversion parameter Both
approaches capture equity in terms of inequality but not necessarily
poverty impact In order to capture the subsidy bene1047297ts around an
absolute poverty threshold I use a Growth Incidence Curve as de-
scribed below
Previous studies that quantify the impact of subsidy diversions in
India focus on the quantity of subsidized kerosene that households
actually receive I also account for the actual PDS kerosene price
paid by households which varies signi1047297cantly around the intended
subsidized price
Materiality
The value to households of the subsidy is a reduction in energy
expenditure which enables more discretionary spending on other
goods In contrast to prior studies that focus on mean bene1047297t inci-
dence for households in an income decile I calculate the bene1047297t for
different types of households based on fuel choices which affects
the price they would pay with the subsidys removal In particular
Economy Users would switch to LPG while Last Resort would be
forced to continue using kerosene and pay black market prices
Identifying Economy Users required a heuristic in the absence
of data on LPG reliability Note that all households fall into the 1047297rstcategory (including primary cookinglighting users) except for
those select LPG users whose cost of using subsidized kerosene is
less than that of LPG in energy terms The prevailing relative prices
of LPG and kerosene for a household were used as proxies to identify
this group If households used kerosene as a supplemental fuel even
when LPG was cheaper on an energy basis they presumably had
fuel availability issues They are thus assumed to be Last Resort
Users If the LPG price falls between the subsidized and black market
price of kerosene households are assumed to be Economy Users
The real income loss ΔI caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price Δ pk for the two groups
Last Resort Users (No Fuel Switch)
ΔI frac14 Q ksdot pkminusQ k 1 thorn Δ pksdot η k
sdot pk 1 thorn Δ pketh THORN eth1THORN
Economy Users (Switch to LPG)
ΔI frac14 Q ksdot pkminusQ LPGsdot 1 thorn Δ pksdot η klPG
sdot pLPG eth2THORN
where η k is the own-price elasticity for kerosene demand η kLPG is
the cross-price elasticity of LPG to a change in kerosene price Q k
and pk are the original quantity and price of kerosene and Q LPG
and pLPGare the original quantity and price of LPG (all in energy
units) Note that kerosene demand is inelastic for last resort
users since cooking is an essential function However to allow
for some conservation a sensitivity analysis incorporates elasticity
16 This estimate is based on each family member bathing every day each using 10 li-
ters of hot water heated from 10 degrees C to 70 degrees C and with savings of Rs 025
per megajoule of delivered energy from using kerosene instead of LPG
Note Cooking use assessed as household use above 4 liters per month
Source National Sample Survey of Consumption Expenditure 2004-05
Fig 4 Kerosene use for cookingwater heating mdash Maharashtra 2004ndash05
Fig 5 Kerosene vs LPG delivered fuel cost comparison (2004ndash05 prices)
39ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 59
month for a family of seven 16 This is less than a half a percent of poor
householdsrsquo monthly expenditure Such households may overesti-
mate these savings or consider even such small savings worthwhile
Households that cook with black-market kerosene pay approxi-
mately the same fuel price as LPG (about Rs 22kg on average in
urban Maharashtra) which implies they pay more on an energy basis
than they do to cook with LPG (since kerosene stoves are less ef 1047297cient)
This suggests thatLPG users whobuy black marketkerosene forcooking
must also be Last Resort Users who lack reliable access to LPG
In summary Economy Users may represent a minority of kerosene
users However the 1047297nancial risk to them of removing subsidies is
signi1047297cantly less than others given the thin margins of savings from
using subsidized kerosene over LPG To the extent possible differen-
tiating these households would be important in calculating the distri-
bution of subsidy bene1047297ts
Assessment of subsidy performance
In this section I discuss the merits of kerosene subsidies as a redis-
tributive policy based on three measures materiality progressivity
and ef 1047297cacy I 1047297rst present the measurement approach and metrics
I then discuss the results and the drivers of low ef 1047297cacy
Measurement approach
I 1047297rst present the method for calculating individual household
bene1047297ts in terms of budget share based on the categorization of
kerosene users discussed in the previous section Based on these
budget shares I estimate progressivity and ef 1047297cacy
Several approaches have been used to assess the distributional
bene1047297ts of subsidies to households in other developing countries Acommon approach is to compare energy budgets with and without
the subsidy (Dube 2003 Kebede 2006) for different types of house-
holds I use a similar approach to estimating materiality Dube (2003)
compares households willingness to pay to the price they would pay
without subsidies However this carries a hypothetical bias Instead I
use market prices for substitutes to evaluate budget impacts Saboohi
(2001) calculates Lorenz curves for energy subsidy bene1047297ts to assess
progressivity Olivia and Gibson (2008) use an aggregate welfare
measure that incorporates an inequality aversion parameter Both
approaches capture equity in terms of inequality but not necessarily
poverty impact In order to capture the subsidy bene1047297ts around an
absolute poverty threshold I use a Growth Incidence Curve as de-
scribed below
Previous studies that quantify the impact of subsidy diversions in
India focus on the quantity of subsidized kerosene that households
actually receive I also account for the actual PDS kerosene price
paid by households which varies signi1047297cantly around the intended
subsidized price
Materiality
The value to households of the subsidy is a reduction in energy
expenditure which enables more discretionary spending on other
goods In contrast to prior studies that focus on mean bene1047297t inci-
dence for households in an income decile I calculate the bene1047297t for
different types of households based on fuel choices which affects
the price they would pay with the subsidys removal In particular
Economy Users would switch to LPG while Last Resort would be
forced to continue using kerosene and pay black market prices
Identifying Economy Users required a heuristic in the absence
of data on LPG reliability Note that all households fall into the 1047297rstcategory (including primary cookinglighting users) except for
those select LPG users whose cost of using subsidized kerosene is
less than that of LPG in energy terms The prevailing relative prices
of LPG and kerosene for a household were used as proxies to identify
this group If households used kerosene as a supplemental fuel even
when LPG was cheaper on an energy basis they presumably had
fuel availability issues They are thus assumed to be Last Resort
Users If the LPG price falls between the subsidized and black market
price of kerosene households are assumed to be Economy Users
The real income loss ΔI caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price Δ pk for the two groups
Last Resort Users (No Fuel Switch)
ΔI frac14 Q ksdot pkminusQ k 1 thorn Δ pksdot η k
sdot pk 1 thorn Δ pketh THORN eth1THORN
Economy Users (Switch to LPG)
ΔI frac14 Q ksdot pkminusQ LPGsdot 1 thorn Δ pksdot η klPG
sdot pLPG eth2THORN
where η k is the own-price elasticity for kerosene demand η kLPG is
the cross-price elasticity of LPG to a change in kerosene price Q k
and pk are the original quantity and price of kerosene and Q LPG
and pLPGare the original quantity and price of LPG (all in energy
units) Note that kerosene demand is inelastic for last resort
users since cooking is an essential function However to allow
for some conservation a sensitivity analysis incorporates elasticity
16 This estimate is based on each family member bathing every day each using 10 li-
ters of hot water heated from 10 degrees C to 70 degrees C and with savings of Rs 025
per megajoule of delivered energy from using kerosene instead of LPG
Note Cooking use assessed as household use above 4 liters per month
Source National Sample Survey of Consumption Expenditure 2004-05
Fig 4 Kerosene use for cookingwater heating mdash Maharashtra 2004ndash05
Fig 5 Kerosene vs LPG delivered fuel cost comparison (2004ndash05 prices)
39ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 69
Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact A poverty index for example would not provide an indica-
tion of the relative bene1047297ts between the poor and non-poor Thus a
policy that reduces the poverty gap can be regressive if it bene1047297ts
middle income groups to a greater extent Such a policy could be an
expensive instrument of redistribution
I adapt a measure of lsquopro-poorrsquo growth used in the development
economics literature which uses a lsquo
Growth Incidence Curversquo
(GIC)to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty as de1047297ned by some
poverty threshold (Grosse et al 2008)
Speci1047297cally a variation of the GIC is constructed with the average
income percentage change for every population centile in order of in-
creasing income If the slope of this curve is increasing (decreasing)
the subsidy provides greater (lesser) bene1047297ts to higher income
groups on an individual household basis In aggregate the average
percentage change in income for all centiles (H ) below the threshold
( μ p) is compared to the average percentage change ( μ ) for the entire
population (n) The former would be higher for a progressive policy
μ p frac14 1
H
XH
ifrac141
ΔI i=I i eth3THORN
μ frac14 1
n
Xforalln
ΔI i=I ii
eth4THORN
μ pgt μ rArr Progressive subsidy
Subsidy ef 1047297cacy
One way to compare redistributive policies is to consider them as
various mechanisms for enabling a lump sum transfer to particular
household groups In this vein the ef 1047297cacy would be the share of
the total subsidy value that the intended bene1047297ciaries receive The
inverse of ef 1047297cacy can be interpreted as the cost per unit of income
relief provided to the intended bene1047297ciaries The ef 1047297cacy can be cal-
culated as follows
sumforallHH
ΔI
C minusP Subsidy
Q AggQuota
eth5THORN
The denominator represents the aggregate subsidy value or 1047297scal
cost where Q AggQuota is the total quota allocated to targeted house-
holds C is the cost of production and P subsidy is the subsidy price
The numerator represents the actual savings to households where
∆I is shown in Eqs (1) and (2) in Section 311
I evaluate the metric for two sets of bene1047297ciaries all households
and only those households earning below $2capitaday17 The for-
mer captures the subsidy value that is lost due to reasons other
than targeting among household groups while the latter includestargeting failures as well
Data
All household expenditure and household fuel use data are drawn
from the NSS0405 Surveys show quantities and prices for all fuels in-
cluding both subsidized and black market kerosene No estimates are
available for kerosene cooking elasticity in India There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Koumlhlin 2008 Gupta and
Koumlhlin 2006) However these estimates are not appropriate in the
current context for several reasons primarily because they measure
substitution effects which are not applicable to ldquolast resortrdquo users18
Since kerosene is a last resort and both cooking and lighting are
essential functions demand ought to be inelastic To be conservative
however I test a range of own-price elasticities of minus01 to minus025
and present results for the lower 1047297gure This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (minus039plusmn025 for electricity and minus038plusmn022 for
water (Komives et al 2005))19 For similar reasons the base case
cross-price elasticity for LPG was assumed to be 09 But for some
conservation in the face of higher kerosene prices Economy Users
would have no reason to shift less than the full amount of cooking
energy to LPG
Subsidy performance results
Here I present the results of the analysis
Materiality
Among those spending less than$2day in rural and urban areas the
average income relief from the kerosene subsidy amounts to 03 and
05 of household expenditure respectively However the bene1047297ts
vary widely by income centiles from 0 to 13 of household expendi-
ture Further almost 24 and 47 of the rural and urban kerosene-
using population respectively receives bene1047297ts that exceed 1 of total
expenditure (Fig 6) With an elasticity of minus025 these 1047297gures drop to
10 and 33 Savings are highest in metropolitan urban areas such as
in Mumbai and in remote districts with limited LPG supply
For instance for the poor in District 1 ndash a remote district with 13
million people ndash the savings on average are 17 of their monthlyexpenses and over 5 for those earning less than $1day Considering
that the poorest urban households spend over 10 of their income on
energy (World Bank 2003) this could double their energy budgets in
the worst case
Among LPG (higher income) users Last Resort users have an aver-
age savings of 05 while Economy Users have savings of 04 with
the reduction being higher at upper middle income levels
17 Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~Rs 1000 assuming a
purchasing power parity exchange rate of Rs 16$ in 2004ndash05 (Source http
unstatsunorgunsdmdgSeriesDetailaspxsrid=699)
18 The studies use cross-sectional data (and therefore estimate long-term elasticity)
for the entire country do not differentiate cooking from lighting and capture the ef-
fects of substitution rather than just conservation19 Figures show median and one standard deviation for studies from 31 countries
and 57 separate estimates of elasticities for electricity and from 18 countries and 155
separate estimates of elasticities for water
Note based on estimates of lsquomaximalrsquo savings ndash kerosene price elasticity of -01
Total Population Urban ndash 37 million Rural ndash 55 million
Fig 6 Population share by kerosene subsidy bene1047297t mdash Maharashtra 2004ndash05
40 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 79
This 1047297nding has important implicationsfor the relationship between
LPG and kerosene policies The more liquid and reliable the LPG market
the less upper income households would use kerosene This would im-
prove theprogressivityof kerosene subsidies simply by altering market
incentives Note thatthis 1047297nding is different fromthe conventional wis-
dom that LPG pricing alone would in1047298uence kerosene use
Progressivity
Fig 7 below shows the cumulative average savings as a share of
household expenditure Several observations stem from the 1047297gures
First in rural areas the subsidy bene1047297ts are regressive The cumula-
tive average savings rate (Eqs (3) and (4)) is 037 for those who
earn under $1day 041 for those who earn below $2day
However in urban areas the subsidy is consistently progressive
for the entire population using the same thresholds20 The average
income relief is 058 for lower income groups and 053 for middle
income groups
Policy ef 1047297cacy
The ef 1047297cacy of the kerosene subsidy (Eq (5)) from the perspective
of al l households is at best ~265 That is for every 100 Rupees of
subsidy only Rs 265 of income relief is delivered to households
directly The ef 1047297cacy for delivering income relief to those earning
under $2day is 17 Thus for every rupee of income transferred to
these poor six rupees has to be spent by the government
The low ef 1047297cacy re1047298ects thefact that only 313 of thekerosene pick-
ed up by wholesalers was delivered to households through the PDS in
2004ndash05 based on NSSO0405 The difference of ~5 percentage points
between the quantity (313) and bene1047297t (265) shortfalls is attributable
to price discrimination That is householdspay prices that include actu-
al transport costs and rents in addition to the wholesale subsidy price
Kerosene subsidies and ideal implementation
The shortfall in the subsidy value that reaches households can be at-
tributed to design failures and implementation failures For policy re-
formists this distinction would be important Even under idealimplementation conditions a kerosene subsidy can only bene1047297t
kerosene users up to the use of their quota The mismatch between de-
mand and the quota re1047298ects the limits of the value of the subsidy even
under idealimplementation conditions (Fig8) The correlationbetween
household quotas and their usage was found to be only 22 in rural
areas and 58 in urban areas indicating that the quota design is better
suited to urban kerosene needs Implementation failures on the other
hand are re1047298ected in the fact that households purchase part of their en-
titled kerosene quotas in the black market or that they fail to obtain the
intended subsidy price for the part of the quota they do obtain Indeed
67 million of the 10 million urban dwellers in Maharashtra who cook
with kerosene purchase at least as much kerosene in the black market
as the shortfall in their quota Both these types of failures and their con-
sequences for ef 1047297cacy are discussed next
Design failures
Most poor households do not claim their entitled share of subsi-
dized kerosene as re1047298ected in the gap between the average quota
and total usage (Fig 8) This is the case in rural areas across all income
groups As mentioned earlier most rural households cook with wood
Since the government allocates quotas based on cooking needs but
rural households purchase PDS kerosene mostly for lighting rural
households forego most of their quota In urban households and par-
ticularly metropolitan areas on the other hand kerosenes use for
cooking aligns with the quota except for where low-income house-
holds have access to wood as discussed earlier (Note that in Maha-
rashtra I estimate cooking demand to account for only 21 of
kerosene demand in rural areas but 61 in urban areas which is
slightly higher than the national averages shown earlier)At the same time about a 1047297fth of households in the lowest three
deciles in urban areas buy kerosene in excess of their quotas
(Fig 9) This heterogeneity among the urban poor stems from varying
access to wood as re1047298ected in the fact that those who forego their
quotas consume on average about four times the quantity of wood
as those that consumer above their quotas In rural areas because
kerosene use increases with income the share of households whose
kerosene purchases exceed their quota also increases with income
Thus the discrepancy between allocated quotas and demand
reinforces the difference in kerosene bene1047297ts between urban and
rural areas The progressivity of subsidies would likely increase in
urban areas from better targeted and potentially higher quotas for ker-
osene subsidies In rural areas on the other hand the extent of unused
quotas only provides incentives for their diversion to other sectors
Fig 7 Kerosene subsidy progressivity urban and rural Maharashtra 2004ndash5
20 Note that prices in urban areas are signi1047297cantly higher so the same cutoff re1047298ects
greater poverty than in rural areas Data were unavailable to create price-adjusted pov-
erty thresholds
a) Urban
b) Rural
Fig 8 Kerosene subsidy quotas and actual use
41ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 89
The question then arises as to what the best attainable ef 1047297cacy
would be under lsquoidealrsquo implementation conditions given the design
limitations This is discussed next
Subsidy performance under lsquo idealrsquo implementation
Subsidy bene1047297ts in ideal implementation conditions entail that
households satisfy all their kerosene requirements through the PDS
and at prices corresponding to the intended subsidy price (including
a legitimate distance-sensitive transportation charge) The three
metrics ndash materiality progressivity and ef 1047297cacy ndash under lsquoidealrsquo imple-
mentation conditions are as follows
If the subsidy were ideally implemented its material impact
would double For urban households earning under $2day the bene-
1047297ts would amount to 11 (compared to 05 in practice)
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery imply-
ing that income does not seem to be a basis for denying households
their quota21
With regard to ef 1047297cacy the share of subsidy value that would
go to households would increase to 39ndash46 using a subsidy price(including transportation) of Rs 11 and 10 per liter respectively22
Results summary
In urban areas coverage of the poor is relatively low but the
materiality of subsidies is higher and black market purchases repre-
sent a higher share of total consumption This makes the subsidies
progressive and their removal potentially costly for particular urban
groups that have few alternative cooking fuels For these households
income relief from kerosene subsidies amounts to a range of 1ndash5 of
their monthly expenditure
In rural areas the subsidy coverage is high but of low material
value because of widespread use of small amounts of kerosene for
lighting It is also regressive since higher income households whouse kerosene as a backup to LPG have higher bene1047297ts The bulk of
households that use kerosene for lighting obtain income relief of
0 to 04 Most of the quota goes unused
Most of the loss in subsidy value seems to result from poor suit-
ability of kerosene subsidies as instruments of redistribution Even
under perfect delivery of subsidies to households the policy ef 1047297cacy
improves from 26 to 46 at best
Policy implications
The Kirit Parikh expert committees recommendation to phase
out kerosene subsidies may be premature Reforming the kerosene
subsidy requires different approaches in the short and long term By
focusing on rural kerosene use for lighting current policy analysis
neglects important distributional bene1047297ts of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is lim-
ited On average income bene1047297
ts of the kerosene subsidy are about05 of household expenditure but among the urban poor income
shocks of 1ndash5 are likely corresponding to at worst a doubling of
households cooking budgets
In theshort-term theef 1047297cacy of the subsidycan be improved without
losing these limited bene1047297ts by redesigning households quotas of subsi-
dized kerosene to better re1047298ect households needs mdash cooking in urban
areas and lighting in rural areas This would reduce the total subsidy re-
quirement considerably by preventing the loss of about half of the 74
of the subsidy value that gets diverted as rents along the supply chain
In the long-termwhether the subsidy distribution systemshould be
reformed or eliminated requires a broader evaluation of alternative re-
distributive instruments This study shows that kerosene is typically a
backup cooking fuel making the value of the subsidy dependent on
theavailability of other preferred fuels such as LPG and woodThis em-
phasizes the importance of the kerosene subsidy as only an instrument
of redistribution Alternative redistributive instruments should there-
fore be evaluated among other things based on the metrics used in
this study The feasibility and cost of institutional reform is also impor-
tant to study in evaluating alternative redistributivepoliciesThe major-
ity of the loss of subsidy value results from rent extraction at numerous
points of distribution that are controlled by entrenched interests These
entrenched interests that drive the kerosene black market may make
subsidy reduction or removal politically challenging
Acknowledgements
I am grateful to my Research Assistant Evan Woods and to Gautam
Dutt and two anonymous reviewers for their comments
Appendix A Maharashtra kerosene quota allocation
Source Maharashtra Food Civil Supplies and Consumer Protec-
tion Department (httpwwwmaharashtragovinenglishfood
schemesKerosenephp )
Methodology for Determining Household Quotas from NSSO Data
Households entitlementswere calculated based on fuel usedata in
the NSSO0405 Households that did not useLPG were identi1047297edby the
21 In the primary survey several interviewees described methods of discrimination
by ration shop owners that could be in1047298uenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases political and social connec-
tions etc) But these do not manifest in NSSO data as robust trends across the state
Their examination would be a topic for future research22 Using a distance-sensitive transportation surcharge for households by district
would yield a 1047297gure in between these
LPG non-LPG A rea Quantum
[liters per person]
Maximum
(l)
Non LPG
connection
holder
Rural 15 to 2 15
Urban 2 15
Municipal
corporations
amp lsquoArsquo class
municipalities
Persons Liters 24
1 Person 3
2 Persons 8
3 Persons 10
4 and more persons 3 per person
MumbaindashThane
rationing area
1 Person 5 24
2 Persons 12l
3 Persons 154 Persons 18
5 Persons 21
6 Persons 23
7 and more persons 24
LPG connection
holder
All areas 1 Cylinder 4
2 Cylinder Nil
Note Data show households that purchase any amount of kerosene in excess of their quotas
Fig 9 Households with insuf 1047297cient kerosene quotas mdash Maharashtra 2004ndash05
42 ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43
8172019 Kerosene Subsidies
httpslidepdfcomreaderfullkerosene-subsidies 99
absence of LPG consumption in the survey TheNSSO0405 does notin-
dicate how many cylinders households own Households with two
LPG cylinders were assumed to be those households that did not use
any backup fuel All other households that used LPG were assumed
to have one cylinder Data on household size and location were used
to determine the 1047297nal kerosene entitlement (as de1047297ned above)
References
Chaturvedi BK Report of the High Powered Committee on Financial Position of OilCompanies Petroleum Ministry Government of India 2008
Datta A The incidence of fuel taxation in India Energy Econ 201032S26 ndash33Dube I Impact of energy subsidies on energy consumption and supply in Zimbabwe
Do the urban poor really bene1047297t Energy Policy 2003311635ndash45Dutt GS Mills E Illumination and sustainable development Part II Implementing light-
ing ef 1047297ciency programs Energy Sustain Dev 1994117ndash27Gangopadyaya S Ramaswami B Wadhwa W Reducing subsidies on household fuels in
India how will it affect the Poor Energy Policy 2005332326 ndash36Grosse M Harttgen K Klasen S Measuring pro-poor growth in non-income dimen-
sions World Dev 2008361021ndash47Gundimeda H Koumlhlin G Fuel demand elasticities for energy and environmental
policies Indian sample survey evidence Energy Econ 200830517ndash46Gupta G Koumlhlin G Preferences for domestic fuel Analysis with socio-economic factors
and rankings in Kolkata India Ecol Econ 200657107ndash21Heltberg R Household energy use in developing countries a multicountry study In
ESMAP Technical Paper editor Washington DC The World Bank 2003Hosier RH Kipondya W Urban household energy use in Tanzania Prices substitutes
and poverty Energy Policy 199321454ndash73IEA Looking at energy subsidies Getting the prices right World Energy Outlook
Washington DC International Energy Agency 1999
IEA World Energy Outlook 2007Kebede B Energy subsidies and costs in urban Ethiopia the cases of kerosene and
electricity Renew Energy 2006312140ndash51KomivesK Foster Vivien Halpern Jonathan Wodon QuentinWater Electricity and the
Poor Who Bene1047297ts from Utility Subsidies Washington DC World Bank 2005Mahapatra S Chanakya HN Dasappa S Evaluation of various energy devices for
domestic lighting in India Technology economics and CO2 emissions EnergySustain Dev 200913271ndash9
Morris S Pandey A Barua Samir K A Scheme for Ef 1047297cient Subsidization of Kerosene inIndia Indian Institute of Management Working Paper Series 2006 Ahmedabad
NCAER Comprehensive Study to Assess the Genuine Demand and Requirement of SKO
(Special Kerosene Oil) India National Council for Applied Economic Research2005Olivia S John Gibson Household Energy Demand and the Equity and Ef 1047297ciency
Aspects of Subsidy Reform in Indonesia Energy J 20082921ndash39Parikh KS Report of The Expert Group on A Viable and Sustainable System of Pricing of
Petroleum Products Government of India 2010Piketty T Qian Nancy Income Inequality and Progressive Income Taxation in China and
India 1986ndash2015 Appl Econ 2009153ndash63Pitt MM Equity externalities and energy subsidies The case of kerosene in Indonesia
J Dev Econ 198517201ndash17Reddy AKN A Strategy for Resolving Indias Oil Crisis Curr Sci 19815050ndash3Shelar M Barahate SD Rathi MR Pethkar VD Energy stamps to discourage inef 1047297cient
use of kerosene and reduce emissions from autorickshaws a case-study fromMaharashtra India Energy Sustain Dev 20071174ndash7
Shenoy BV Lessons Learned from Attempts to Reform Indias Kerosene SubsidyGeneva International Institute for Sustainable Development 2010
UNEP Reforming Energy Subsidies Opportunities to Contribute to the Climate ChangeAgenda Division of Technology Industry and Economics United Nations Environ-ment Program 2008
World Bank Access of the Poor to Clean Household Fuels in India In South AsiaEnvironment and Social Development Department editor Washington DCWorld Bank 2003
43ND Rao Energy for Sustainable Development 16 (2012) 35ndash43