Energy for Sustainable Development 16 (2012) 3543

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Energy for Sustainable Development

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 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

a b s t r a c t
Kerosene subsidies intended for Indian households have been known for their poor targeting and high scal
costs. However, the distributional benets to the 160 million households that use kerosene are not well understood. In this paper, the kerosene subsidy is formally assessed as an instrument of income redistribution.
The subsidy incidence, progressivity and efcacy of the kerosene subsidy are calculated for the state of Maharashtra, under actual and ideal implementation conditions.
The analysis shows that kerosene subsidies are regressive and of minimal nancial value to poor rural households. This is in part because household quotas are based on cooking needs, but kerosene is used predominantly for lighting. In urban areas, subsidies are progressive, and provide benets 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 efcacy than broad-based subsidies.
2012 International Energy Initiative. Published by Elsevier Inc. All rights reserved.

Introduction
Energy consumption subsidies have attracted renewed attention
with 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
0.7% of world GDP (IEA, 2007). These subsidies are often justied 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 consumption and increase greenhouse gas emissions without necessarily
providing intended benets to the poor. The International Energy
Agency (IEA) estimates that the cost to economic growth from consumption subsidies in just the eight largest non-OECD countries is
257 billion dollars (IEA, 1999). Among household cooking fuels,
while LPG subsidies typically benet higher income households, the
distribution of benets from kerosene subsidies are more ambiguous
(Heltberg et al., 2003). This is part due to kerosene's 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
per year, despite undertaking price reform of fossil fuels in the last decade. With the recent run-up in world crude oil prices since 2005, the
cost of subsidies more than doubled (Shenoy, 2010). Kerosene use also

E-mail address: nrao@iiasa.ac.at.

accounted for over 28 million tons of CO2 emissions in 200405, 1 or

over 2% of the country's CO2 emissions. A number of expert committees commissioned by the Indian government in the past have recommended phasing out the kerosene subsidies and replacing them with
alternative subsidy mechanisms (Chaturvedi, 2008; Parikh, 2010).
Government reports show that kerosene's use as a primary fuel for
lighting and cooking has been on the decline. However, these assessments 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. Similarly, although about 1.9 million rural households (~ 1.2%) and 5.8
million urban households (~ 10.2%) use kerosene as their primary
cooking fuel, another 28 million households in rural areas and 5.5
million urban households likely use kerosene as a supplementary
fuel for cooking and/or water heating. 2 In total, cooking use may
1
Assuming emissions of 2.5 kg CO2/l, from 11 billion l of annual consumption in
200405 (Indiastat.com).
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 2.753.9 l per
month on average, as per the National Sample Survey of India 200405.

0973-0826/$ see front matter 2012 International Energy Initiative. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.esd.2011.12.007

Electronic copy available at: http://ssrn.com/abstract=2047018

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N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

have contributed 23% of the 7.2 billion l of kerosene consumed in

Indian households in 200405, 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 460,000 private licensed retailers who sell subsidized grains and kerosene. In
contrast with LPG and subsidized grains, which are sold in dual
markets one subsidized, and the other an open market kerosene
is sold only through the PDS (PDS kerosene). However, PDS kerosene 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 syndicates. 3
The Kirit Parikh expert committee recommendation to reduce
kerosene subsidies is justied in part from their nding that the income 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 benets, 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 benets 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 subsidy's materiality (how does the energy budget
change with its removal) and its progressivity (do poor households
benet more than the average household). For purposes of comparison with other redistributive policies, I assess efcacy (what share
of the total subsidy value goes to poor households, not counting
indirect impacts 4). Among the novelties of this study is that I explore
the distinction between implementation failures and design limitations, and evaluate the subsidy benets under ideal implementation
conditions. This is also the rst use of efcacy metric in terms of
subsidy value rather than quantity. This study highlights an underemphasized feature of kerosene's 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 (e.g., 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.

provide income benets to the poor, and that kerosene use tends to
rst increase and then decrease with income.
The high scal and environmental costs of household fuel subsidies in India have been well documented in the above cited studies.
Economists estimate that kerosene subsidies, in particular, cost
the government $46 billion per year, and carry efciency losses 5 of
$12 billion per year (IEA, 1999; Morris et al., 2006). It is well
known that suppliers and distributors divert 4066% of kerosene allocated 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 nancial impacts of
the subsidies that do reach households are not formally estimated.
One study of fuel taxation in India nds that the direct income benets from household kerosene use are progressive (Datta, 2010). However, the study offers limited detail on underlying regional differences
and causes. Further, progressivity alone may not justify public spending on kerosene subsidies. Subsidies may be regressive but still
provide substantial income relief to the poor. Conversely, even if kerosene subsidies are progressive, other less progressive redistributive
policies may have higher impacts on poverty and cost less to deliver.
The efcacy measure used in this study provides a metric for such a
comparison across policies.
Many studies illustrate the inappropriateness of encouraging kerosene 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 inefcient 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
efcacy of kerosene subsidies in urban and rural areas.
This study relies on data from the National Sample Survey of India
for Consumption Expenditure, 200405 (NSSO0405) and draws qualitative insights from a primary survey I had conducted of 450 households in urban and peri-urban parts of Maharashtra in 2009/2010
(primary survey).
In Section 2, I describe the various uses for kerosene in different
household in Maharashtra, and how these functions inuence the
subsidy's relative benets. 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 implementation conditions. I close with some policy recommendations in
Section 5.

Previous literature

Kerosene market and use characteristics in Maharashtra

As mentioned, several studies examine the macroeconomic costs

of energy subsidies in developing countries. On the benet side, the
World Bank nds 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 kerosene, whose use does not correlate well with income, particularly
when considering its use for cooking. This makes its distributional
benets more difcult to predict. Many case studies in various developing countries examine the income benets 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 nd that kerosene subsidies

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 households 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.

See Maharashtra Cracks Down on Oil Maa, Hindu Business Line, January 28, 2011.
Kerosene that is diverted to automobile and other markets have income distributional impacts as well, such as the rents earned by middlemen, or the marginal prots
earned by beneciaries of adulterated fuel. Data on these diversions are unavailable.
4

5
Efciency losses refer to reduced aggregate income from the misallocation of investments in response to price signals that do not reect actual costs. In economic jargon, this is calculated as the dead weight losses that result from pricing below
marginal cost.
6
In transportation, kerosene is used to adulterate gasoline and diesel. In construction, kerosene is used in making tar for paving roads.

Electronic copy available at: http://ssrn.com/abstract=2047018

N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

37

a) Rural

Fig. 1. Variation in urban household kerosene use Mumbai, Maharashtra and India
200405.

b) Urban

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 underemphasized characteristics of kerosene use in households
are important in understanding the benet incidence of subsidies:
actual kerosene market prices, and kerosene's use as a cooking fuel.
These are discussed next, along with how they affect subsidy benets.
Kerosene markets
Households are supposed to purchase all their household kerosene 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 household's quota is calculated, and in turn each ration
shop's 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 secondary (black) markets (Table 1).
For kerosene, unlike other subsidized products, households quotas
are dened based on their assumed reliance on kerosene for cooking,
and not on their poverty status.7 Lighting needs are not included in
the design of the quota. The quota criteria include two household
characteristics: the number of LPG cylinders,8 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 families. 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 ration
shops in 200405, of which about 129 million l on average were
claimed for distribution. 9 A bottom-up aggregation of household
7
Ration cards are issued to citizens of India, which delineate broad categories of annual income for households: yellow (bRs 15,000, below poverty line), saffron (Rs
15,000-Rs 100,000), and white (>Rs 100,000). Food subsidy quotas are allocated based
on these categories.
8
Households purchase LPG in cylinders that typically contain 14.2 kg of LPG. Households pay a deposit to get a cylinder, then subsequently buy rells by swapping out
empty cylinders for full ones. Households face delays in receiving rells. Thus, households that can afford two cylinders have a reliable supply.
9
State-wise Superior Kerosene Oil (SKO) Allocated under Public Distribution System (PDS) in India 20045 to 20078' and State-wise Superior Kerosene Oil (SKO)
Uplifted under Public Distribution System (PDS) in India 20045 to 20078', IndiaStat.com. These allocations and claimed gures have remained fairly constant in the
time period covered by the data source.

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 Maharashtra, 200405.

quotas from NSSO0405 indicates that 118 million l ought to have

been allocated. The discrepancy may reect a margin of error from
using a sample survey to determine households eligibility criteria, 10
and the likely mismatch between households actual and recorded
eligibility. Regardless, as mentioned earlier, a large share of this allocation 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
kerosene's 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 kerosene. These prices are the lowest alternate price most households
would face should kerosene subsidies be lifted. 11 More importantly,
the PDS kerosene price that households actually pay also varies
widely, but only to a minority of households (Fig. 3).
About 5.6 million people in Maharashtra (13% of PDS kerosene
users) bought PDS kerosene at above Rs 12/l (higher than the highest
intended price, including transport and prot) in 200405. In many
districts, prices are as much as double the wholesale rate.

10
See Appendix A for how the household quota was inferred from sample survey
data.
11
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 market prices are available in NSSO0405 in household surveys as the price of other kerosene purchases made outside the PDS.

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N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

Table 1
Kerosene consumption by market: Maharashtra 200405.

Table 2
Household kerosene use by function, region and priority in Maharashtra.

Monthly,
million liters

HH quota
total

HH PDS
purchase

HH black market
purchase

Diversions to
other markets

Rural
Urban
Totals

80
38
118

25
15
40

12
16
28

42
7
50

Source for PDS and black market purchases: National Sample Survey Consumption
Expenditure, 20045.
See Appendix A for details on quota estimation.
Numbers don't add due to rounding.

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, 4.5 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 kerosene
users, and therefore stand to benet 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, Maharashtra's household quota allocation scheme is indeed based on household cooking
needs. This group of households not only would consume more

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 Maharashtra 200405.

Million users

Lighting

Cooking

Primary
Secondarya

12.2 (R) 1.3 (U)

NAb

b0.1 (R) 4.5 (U)

>17.0 (R) >10.0 (U)

Source: National Sample Survey of Consumption Expenditure, 2004-05.

a
Secondary use for cooking estimated as households with LPG or wood use and
>4 l/month of kerosene.
b
The purpose of kerosene use up to 4 l cannot be inferred from NSSO data.

kerosene than lighting users, but a subset of them might also pay a different 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 cylinders or piped gas supply.

Drivers of kerosene use as a secondary cooking fuel

An important feature of kerosene's secondary use is that it is driven
not only by unreliable supply of households primary fuel, but also by
the desire to save fuel costs. Households for which kerosene is cheaper
than LPG on a useful energy basis (Economy Users) use kerosene regardless of LPG availability.12 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, regardless of their supply conditions. 13 For example, in the primary survey 60% of all households, and almost all low-income households, use
different 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 insufcient LPG supply (Last Resort Users) is
that the former benet less from subsidies, since they can switch back
to LPG if cooking with kerosene becomes more expensive.14 Note that
some low-income households who use kerosene because they would
otherwise pay more for using 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 analysis. 15
It would seem that the margin of subsidy benets for Economy
Users is small. For these households, the economics of cooking with
LPG and kerosene depend on their relative energy (rather than life
cycle) 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
12
A number of other factors inuence households' cooking fuel choices, other than fuel economy otherwise Economy Users would not use LPG at all. Non-economic preferences for cooking fuel are a rich and underexplored topic in literature that merits
further research.
13
This was observed in the household survey.
14
The heat content of the fuels and their stoves' efciencies determine their cost in
energy terms, given fuel prices.
15
Wood was found to be more expensive than PDS kerosene on an energy basis for
only about 230,000 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.

N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

39

Fig. 5. Kerosene vs. LPG delivered fuel cost comparison (200405 prices).
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 cooking/water heating Maharashtra 200405.

month for a family of seven. 16 This is less than a half a percent of poor
households monthly expenditure. Such households may overestimate these savings, or consider even such small savings worthwhile.
Households that cook with black-market kerosene pay approximately the same fuel price as LPG (about Rs 22/kg 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 efcient).
This suggests that LPG users who buy black market kerosene for cooking
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 nancial risk to them of removing subsidies is
signicantly less than others, given the thin margins of savings from
using subsidized kerosene over LPG. To the extent possible, differentiating these households would be important in calculating the distribution of subsidy benets.
Assessment of subsidy performance
In this section, I discuss the merits of kerosene subsidies as a redistributive policy based on three measures: materiality; progressivity;
and efcacy. I rst present the measurement approach and metrics.
I then discuss the results and the drivers of low efcacy.
Measurement approach
I rst present the method for calculating individual household
benets, 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 efcacy.
Several approaches have been used to assess the distributional
benets of subsidies to households in other developing countries. A
common approach is to compare energy budgets with and without
the subsidy (Dube, 2003; Kebede, 2006) for different types of households. 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 benets 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
16
This estimate is based on each family member bathing every day, each using 10 liters of hot water heated from 10 degrees C to 70 degrees C, and with savings of Rs 0.25
per megajoule of delivered energy from using kerosene instead of LPG.

poverty impact. In order to capture the subsidy benets around an

absolute poverty threshold, I use a Growth Incidence Curve, as described 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 signicantly 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 benet incidence for households in an income decile, I calculate the benet for
different types of households based on fuel choices, which affects
the price they would pay with the subsidy's 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 rst
category (including primary cooking/lighting 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 I caused by the subsidy removal can be
estimated as follows for a given percentage change in the kerosene
price, pk for the two groups:
Last Resort Users (No Fuel Switch):



I Q k pk Q k 1 pk k pk 1 pk

Economy Users (Switch to LPG):


I Q k pk Q LPG 1 pk klPG pLPG

where k is the own-price elasticity for kerosene demand; kLPG is

the cross-price elasticity of LPG to a change in kerosene price; Qk
and pk are the original quantity and price of kerosene, and QLPG
andpLPGare 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.

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N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

Subsidy progressivity
Progressivity is an important metric for policies that have a wide
impact. A poverty index, for example, would not provide an indication of the relative benets between the poor and non-poor. Thus, a
policy that reduces the poverty gap can be regressive if it benets
middle income groups to a greater extent. Such a policy could be an
expensive instrument of redistribution.
I adapt a measure of pro-poor growth used in the development
economics literature, which uses a Growth Incidence Curve (GIC)
to measure the extent to which income growth accrues to the poor
relative to what accrues to those above poverty, as dened by some
poverty threshold (Grosse et al., 2008).
Specically, a variation of the GIC is constructed with the average
income percentage change for every population centile in order of increasing income. If the slope of this curve is increasing (decreasing),
the subsidy provides greater (lesser) benets to higher income
groups on an individual household basis. In aggregate, the average
percentage change in income for all centiles (H) below the threshold
(p) is compared to the average percentage change () for the entire
population (n). The former would be higher for a progressive policy.
H
1X
p
I =I
H i1 i i

1X
i
I =I
n n i i

p > Progressive subsidy

Subsidy efcacy
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 efcacy would be the share of
the total subsidy value that the intended beneciaries receive. The
inverse of efcacy can be interpreted as the cost per unit of income
relief provided to the intended beneciaries. The efcacy can be calculated as follows:

Note: based on estimates of maximal savings kerosene price elasticity of -0.1.

Total Population: Urban 37 million; Rural 55 million.

Fig. 6. Population share by kerosene subsidy benet Maharashtra 200405.

Khlin, 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 last resort users. 18
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 0.1 to 0.25,
and present results for the lower gure. This is similar to the lower
end of ranges for elasticities of residential utilities that have few
close substitutes (0.39 0.25 for electricity and 0.38 0.22 for
water (Komives et al., 2005)). 19 For similar reasons, the base case
cross-price elasticity for LPG was assumed to be 0.9. 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.

I
HH 

CP Subsidy :Q AggQuota

The denominator represents the aggregate subsidy value, or scal

cost, where QAggQuota is the total quota allocated to targeted households. C is the cost of production, and Psubsidy is the subsidy price.
The numerator represents the actual savings to households, where
I is shown in Eqs. (1) and (2) in Section 3.1.1.
I evaluate the metric for two sets of beneciaries: all households,
and only those households earning below $2/capita/day. 17 The former captures the subsidy value that is lost due to reasons other
than targeting among household groups, while the latter includes
targeting failures as well.
Data
All household expenditure and household fuel use data are drawn
from the NSS0405. Surveys show quantities and prices for all fuels, including both subsidized and black market kerosene. No estimates are
available for kerosene cooking elasticity in India. There are only two
known studies that estimate own- and cross-price elasticities of
household fuels in India (Gundimeda and Khlin, 2008; Gupta and
17
Equivalent to a Monthly Per Capita Expenditure (MPCE) of ~ Rs. 1000, assuming a
purchasing power parity exchange rate of Rs 16/$ in 200405. (Source: http://
unstats.un.org/unsd/mdg/SeriesDetail.aspx?srid=699).

Materiality
Among those spending less than $2/day in rural and urban areas, the
average income relief from the kerosene subsidy amounts to 0.3% and
0.5% of household expenditure respectively. However, the benets
vary widely by income centiles, from 0 to 1.3% of household expenditure. Further, almost 24% and 47% of the rural and urban keroseneusing population respectively receives benets that exceed 1% of total
expenditure (Fig. 6). With an elasticity of 0.25, these gures 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 a remote district with 1.3
million people the savings on average are 1.7% of their monthly
expenses, and over 5% for those earning less than $1/day. 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 average savings of 0.5%, while Economy Users have savings of 0.4%, with
the reduction being higher at upper middle income levels.

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 effects of substitution, rather than just conservation.
19
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.

N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

41

a) Urban

Fig. 7. Kerosene subsidy progressivity: urban and rural Maharashtra 20045.

b) Rural
This nding has important implications for 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 improve the progressivity of kerosene subsidies, simply by altering market
incentives. Note that this nding is different from the conventional wisdom that LPG pricing alone would inuence kerosene use.
Progressivity
Fig. 7 below shows the cumulative average savings as a share of
household expenditure. Several observations stem from the gures.
First, in rural areas, the subsidy benets are regressive. The cumulative average savings rate (Eqs. (3) and (4)) is 0.37% for those who
earn under $1/day, 0.41% for those who earn below $2/day.
However, in urban areas, the subsidy is consistently progressive
for the entire population, using the same thresholds. 20 The average
income relief is 0.58% for lower income groups, and 0.53% for middle
income groups.
Policy efcacy
The efcacy of the kerosene subsidy (Eq. (5)) from the perspective
of all households is at best ~26.5%. That is, for every 100 Rupees of
subsidy, only Rs 26.5 of income relief is delivered to households
directly. The efcacy for delivering income relief to those earning
under $2/day is 17%. Thus, for every rupee of income transferred to
these poor, six rupees has to be spent by the government.
The low efcacy reects the fact that only 31.3% of the kerosene picked up by wholesalers was delivered to households through the PDS in
200405, based on NSSO0405. The difference of ~5 percentage points,
between the quantity (31.3) and benet (26.5) shortfalls, is attributable
to price discrimination. That is, households pay prices that include actual 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 attributed to design failures and implementation failures. For policy reformists, this distinction would be important. Even under ideal
implementation conditions, a kerosene subsidy can only benet
kerosene users up to the use of their quota. The mismatch between demand and the quota reects the limits of the value of the subsidy even
under ideal implementation conditions (Fig. 8). The correlation between
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 reected in the fact that households purchase part of their entitled 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,
20
Note that prices in urban areas are signicantly higher, so the same cutoff reects
greater poverty than in rural areas. Data were unavailable to create price-adjusted poverty thresholds.

Fig. 8. Kerosene subsidy quotas and actual use.

6.7 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 consequences for efcacy are discussed next.

Design failures
Most poor households do not claim their entitled share of subsidized kerosene, as reected 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 particularly metropolitan areas on the other hand, kerosene's use for
cooking aligns with the quota, except for where low-income households have access to wood, as discussed earlier (Note that in Maharashtra 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 fth 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 reected 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 benets between urban and
rural areas. The progressivity of subsidies would likely increase in
urban areas from better targeted, and potentially higher, quotas for kerosene subsidies. In rural areas, on the other hand, the extent of unused
quotas only provides incentives for their diversion to other sectors.

42

N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

Policy implications

Note: Data show households that purchase any amount of kerosene in excess of their quotas.

Fig. 9. Households with insufcient kerosene quotas Maharashtra 200405.

The question then arises as to what the best attainable efcacy

would be under ideal implementation conditions, given the design
limitations. This is discussed next.
Subsidy performance under ideal implementation
Subsidy benets 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 materiality, progressivity and efcacy under ideal implementation conditions are as follows.
If the subsidy were ideally implemented, its material impact
would double. For urban households earning under $2/day, the benets would amount to 1.1% (compared to 0.5% in practice).
What subsidized kerosene does reach households does not appear
to have a distributional bias compared to their ideal delivery, implying that income does not seem to be a basis for denying households
their quota. 21
With regard to efcacy, the share of subsidy value that would
go to households would increase to 3946%, using a subsidy price
(including transportation) of Rs 11 and 10 per liter respectively. 22

The Kirit Parikh expert committee's 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 benets of the subsidy in urban
areas where access to biomass and affordable LPG for cooking is limited. On average, income benets of the kerosene subsidy are about
0.5% of household expenditure, but among the urban poor, income
shocks of 15% are likely, corresponding to at worst a doubling of
households' cooking budgets.
In the short-term, the efcacy of the subsidy can be improved without
losing these limited benets by redesigning households' quotas of subsidized kerosene to better reect households' needs cooking in urban
areas and lighting in rural areas. This would reduce the total subsidy requirement 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-term, whether the subsidy distribution system should be
reformed or eliminated requires a broader evaluation of alternative redistributive instruments. This study shows that kerosene is typically a
backup cooking fuel, making the value of the subsidy dependent on
the availability of other preferred fuels, such as LPG and wood. This emphasizes the importance of the kerosene subsidy as only an instrument
of redistribution. Alternative redistributive instruments should, therefore, be evaluated among other things based on the metrics used in
this study. The feasibility and cost of institutional reform is also important to study in evaluating alternative redistributive policies. The majority 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

Results summary
LPG/ non-LPG

In urban areas, coverage of the poor is relatively low, but the

materiality of subsidies is higher, and black market purchases represent 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 15% 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 who
use kerosene as a backup to LPG have higher benets. The bulk of
households that use kerosene for lighting obtain income relief of
0 to 0.4%. Most of the quota goes unused.
Most of the loss in subsidy value seems to result from poor suitability of kerosene subsidies as instruments of redistribution. Even
under perfect delivery of subsidies to households, the policy efcacy
improves from 26% to 46% at best.
21
In the primary survey, several interviewees described methods of discrimination
by ration shop owners that could be inuenced by their income (such as conditioning
the sale of subsidized kerosene on other grocery purchases, political and social connections, etc.). But these do not manifest in NSSO data as robust trends across the state.
Their examination would be a topic for future research.
22
Using a distance-sensitive transportation surcharge for households by district
would yield a gure in between these.

Area

1.5 to 2
2
Persons
1 Person
2 Persons
3 Persons
4 and more persons
MumbaiThane 1 Person
rationing area
2 Persons
3 Persons
4 Persons
5 Persons
6 Persons
7 and more persons
LPG connection All areas
1 Cylinder
holder
2 Cylinder

Non LPG
connection
holder

Rural
Urban
Municipal
corporations
& A class
municipalities

Quantum
[liters per person]

Maximum
(l)
15
15
24

Liters
3
8
10
3 per person
5
24
12l
15
18
21
23
24
4
Nil

Source: Maharashtra Food, Civil Supplies and Consumer Protection Department. (http://www.maharashtra.gov.in/english/food/
schemesKerosene.php).
Methodology for Determining Household Quotas from NSSO Data
Households' entitlements were calculated based on fuel use data in
the NSSO0405. Households that did not use LPG were identied by the

N.D. Rao / Energy for Sustainable Development 16 (2012) 3543

absence of LPG consumption in the survey. The NSSO0405 does not indicate 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 nal kerosene entitlement (as dened above).
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