By Saurabh Kamdar

In purchasing parity terms, per capita income in India is the second-highest compared with its four immediate south Asian neighbours.

Yet a cylinder of cooking gas (liquefied petroleum gas, or LPG) in Pakistan and Nepal costs twice as much as in India, and ~40 per cent more in Bangladesh and Sri Lanka. Clearly, these countries with far more difficult developmental challenges have bitten the bullet.

In the context, the Narendra Modi government's move this week to hike LPG prices by Rs 4 every month is exactly what the doctor ordered. Just as would be the reported move to raise the price of kerosene by 25 paise every fortnight.

To be sure, LPG prices by itself are not the sole barometer of any government's commitment to extending affordable services. The ability to invest in infrastructure, making services -including revenue models -efficient and viable, while simultaneously extending subsidy to the economically deserving class, actually matter more.

The government seems seized of this and has looked at access to LPG from social, health and environment perspectives.

Switching from wood to LPG reduces net carbon emissions by 67 per cent, according to a study by World LP Gas Association. Estimates are that annually, a non-LPG household -and there are 8 crore of them -consumes wood equal to 10 trees, so the environmental gains from proliferation of LPG are humongous.

Chronic exposure to smoke from the burning of traditional cooking fuels such as firewood and cow dung is said to cause ailments such as asthma and bronchitis. Reasons why LPG connectivity is crucial from a health perspective.

But any attempt to strike a balance between economic and social compulsions throws up challenges, and the politically easier path to take in the case of LPG would be to continue with generalised subsidy .

To be sure, subsidy is a sensitive issue, especially because it affects the livelihood of the poor. And more so since it protects them from market-price vagaries and facilitates sustenance.

Last fiscal alone, under-recoveries in LPG and kerosene tantamount to Rs 20,000 crore. This year's Union Budget has set aside Rs 25,000 crore for oil sector subsidy. And one past attempt to rationalise -ration would a better word, actually -consumption of subsidised LPG cylinders at homes had limited impact because, after setting an annual quota of 6 per year, the number was revised to 9 and eventually to 12 under political pressure, which pulled things back to square one.

The Modi government has adopted a different approach by limiting the amount of subsidy it bears per cylinder.Not surprisingly, as a proportion of the price of a cylinder, subsidy has been reducing. Of course good luck in the form of falling crude prices have played a very important role here. To its credit, the government has been trying to wean people away from subsidy in a methodical manner: it's sourcing more LPG, is ramping up infrastructure or supply and distribution -especially last-mile connectivity -and extending connections to below poverty line (BPL) households through the Pradhan Mantri Ujjwala Yojana (PMUY).

Most importantly, the government has been extraordinarily successful in persuading tens of thousands that didn't need subsidy to Rs Give It Up' voluntarily.

It is also trying to tackle illegal diversion of domestic gas for commercial usage, which in a country as large as India is very difficult to curb completely.What creates room for such sharp practices is a 35 per cent cost differential between a commercial LPG cylinder (Rs 1,000 for a 19 kg cylinder) and a domestic one (Rs 477 for a 14.2 kg cylinder).

The government's approach has been two-pronged: one, target reduction in subsidy and consequently increase the capacity to invest in infrastructure, and two, continue extending benefits to BPL households through PMUY.

Indeed, these are stepping stones to creating open-market efficiencies, and in a progressive society, generic subsidies should be avoided for they are fiscally debilitating incentives and end up creating moral hazards.

Open markets always attract investments, and competition results in better services to consumers. At the end of the day, revenue models have to be viable, too. An efficient LPG ecosystem that offers access to cleaner fuel for the masses at fair prices, and which doesn't haemorrhage through wanton subsidies -or one where subsidies are reinstated at the first sign of political pressure -would indeed qualify as a fairly viable business model.

India's LPG ecosystem seems to be finally taking that road, towards longterm sustainability, by limiting subsidy to only the most deserving lot. Clearly, good economics is good politics.

(Author is Director, CRISIL Infrastructure Advisory)

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View: What's cooking? A healthy LPG ecosystem is what - Economic Times