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Last week, the Planning Commission filed an affidavit in the Supreme Court updating the official poverty line to Rs 965 per month in urban areas and Rs 781 in rural areas. This works out to Rs 32 and and Rs 26 per day, respectively. The perceived inadequacy of these figures has led to widespread discussion and criticism in the media. In light of the controversy, it may be worth looking at where the numbers come from in the first place. Two Measures of the BPL Population The official poverty line is determined by the Planning Commission, on the basis of data provided by the National Sample Survey Organisation (NSSO). NSSO data is based on a survey of consumer expenditure which takes place every five years. The most recent Planning Commission poverty estimates are for the year 2004-05. In addition to Planning Commission efforts to determine the poverty line, the Ministry of Rural Development has conducted a BPL Census in 1992, 1997, 2002, and 2011 to identify poor households. The BPL Census is used to target families for assistance through various schemes of the central government. The 2011 BPL Census is being conducted along with a caste census, and is dubbed the Socio-Economic & Caste Census (SECC) 2011. Details on the methodology of SECC 2011 are available in this short Ministry of Rural Development circular. Planning Commission Methodology Rural and urban poverty lines were first defined in 1973-74 in terms of Per Capita Total Expenditure (PCTE). Consumption is measured in terms of a collection of goods and services known as reference Poverty Line Baskets (PLB). These PLB were determined separately for urban and rural areas and based on a per-day calorie intake of 2400 (rural) and 2100 (urban), each containing items such as food, clothing, fuel, rent, conveyance and entertainment, among others. The official poverty line is the national average expenditure per person incurred to obtain the goods in the PLB. Since 1973-74, prices for goods in the PLB have been periodically adjusted over time and across states to deduce the official poverty line. Uniform Reference Period (URP) vs Mixed Reference Period (MRP) Until 1993-94, consumption information collected by the NSSO was based on the Uniform Reference Period (URP), which measured consumption across a 30-day recall period. That is, survey respondents were asked about their consumption in the previous 30 days. From 1999-2000 onwards, the NSSO switched to a method known as the Mixed Reference Period (MRP). The MRP measures consumption of five low-frequency items (clothing, footwear, durables, education and institutional health expenditure) over the previous year, and all other items over the previous 30 days. That is to say, for the five items, survey respondents are asked about consumption in the previous one year. For the remaining items, they are asked about consumption in the previous 30 days. Tendulkar Committee Report In 2009, the Tendulkar Committee Report suggested several changes to the way poverty is measured. First, it recommended a shift away from basing the PLB in caloric intake and towards target nutritional outcomes instead. Second, it recommended that a uniform PLB be used for both rural and urban areas. In addition, it recommended a change in the way prices are adjusted, and called for an explicit provision in the PLB to account for private expenditure in health and education. For these reasons, the Tendulkar estimate of poverty for the years 1993-94 and 2004-05 is higher than the official estimate, regardless of whether one looks at URP or MRP figures. For example, while the official 1993-94 All-India poverty figure is 36% (URP), applying the Tendulkar methodology yields a rate of 45.3%. Similarly, the official 2004-05 poverty rate is 21.8% (MRP) or 27.5% (URP), while applying the the Tendulkar methodology brings the number to 37.2%. A Planning Commission table of poverty rates by state comparing the two methodologies by is available here.
Last week, oil-marketing companies (or OMCs, such as Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited) raised the price of domestic LPG in the country. [1] The price of a domestic cylinder (14.2kg) has increased from Rs 714 in January 2020 to Rs 858.5 in February 2020. This is a 20% hike in the price of a LPG cylinder. Note that this is the sixth consecutive month for which LPG prices have been revised upwards. Figure 1 shows the variation in price of a domestic (non-subsidised) LPG cylinder in Delhi over the last year.
Figure 1: Variation in price of non-subsidised domestic LPG cylinder
Sources: Indian Oil and Corporation Limited; PRS.
How is the price of LPG cylinders determined?
LPG prices are revised every month. The price is determined by public sector OMCs namely, Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited, in line with the changes in the international market prices and other market conditions. [2] The international market price affects the import parity price of petroleum products (the price that importers pay for import of product at the respective Indian ports). This includes exchange rate, ocean freight, insurance and customs duty among others.
The Ministry of Petroleum and Natural Gas has stated that the recent hike in the price of LPG cylinder is due to a sharp rise in international LPG prices during January 2020 (from USD 448/Metric Tonne to USD 567/Metric Tonne). [3]
What is the difference between the price of a subsidised and non-subsidised cylinder?
The price determined by the OMCs reflects the price of a non-subsidised domestic LPG cylinder. The government modulates the effective price to provide subsidised LPG cylinders to consumers under the 'Pratyaksha Hastaantarit Laabh' direct benefit transfer (or DBT-PAHAL) scheme. [4] Under the scheme, a consumer (with annual income of up to Rs 10 lakh) can avail DBT cash-subsidy for a LPG cylinder. The beneficiaries buy LPG cylinders at market rate and subsequently receive subsidy directly in their bank accounts.
With the recent increase in price of a LPG cylinder, the government has increased the subsidy amount for PAHAL consumers from Rs. 153.86 per cylinder to Rs. 291.48 per cylinder (89% increase).3 This is done to ensure that the subsidized LPG consumers are insulated from the volatility of LPG prices in the international market. Table 1 shows the amount of subsidy provided by the government for LPG cylinder. Note that price of a subsidised cylinder has increased from Rs 494 to Rs 567 (14.8%) from February 2019 to February 2020.
Table 1: Difference between the price of subsidised and non-subsidised LPG cylinder
|
As on |
Non-subsidised cylinder |
Subsidised cylinder |
Subsidy |
|
February 2018 |
Rs 736.00 |
Rs 495.63 |
Rs 240.37 |
|
February 2019 |
Rs 659.00 |
Rs 493.53 |
Rs 165.47 |
|
February 2020 |
Rs 858.50 |
Rs 567.02 |
Rs 291.48 |
Sources: Unstarred Question No.1211, February 13, 2019, Ministry of Petroleum and Natural Gas, Rajya Sabha.
Note: Prices are at Delhi.
How many people avail the subsidy on LPG cylinders?
Currently, there are a total of 27.16 crore LPG (domestic) connections in the country.3 Of these, 26.12 crore (94%) consumers are beneficiaries under the PAHAL scheme, and therefore, can avail LPG cylinders at subsidised rates. Note that, under the scheme, a maximum of 12 subsidised cylinders per year can be availed under one connection. Further, a household cannot have more than one connection.
What is the cost of subsidy for the government?
The subsidy on domestic LPG is met through the budgetary grants of the Ministry of Petroleum and Natural Gas. In 2020-21, the government is estimated to spend Rs 37,256 crore on LPG subsidy. This includes Rs 35,605 crore for DBT-PAHAL and Rs 1,118 crore for Pradhan Mantri Ujjwala Yojana. This is an increase of 9.3% from the expenditure in 2019-20 of Rs 34,086 crore (revised estimate). Note that LPG subsidy constitutes 87% of the Ministry's total budget (Rs 42,901 crore).
Figure 2 below shows the year-wise expenditure on LPG subsidy, and as a proportion of the total budget of the Ministry from 2015-16 to 2020-21.
Figure 2: LPG subsidy over the years (2015-16 to 2020-21).
Sources: Union Budget Documents; PRS.
For more trends and analysis related to the finances of the Ministry of Petroleum and Natural Gas, see here.
[1] "LPG price hiked by Rs 144.5 per cylinder", Economic Times, February 12, 2020, https://economictimes.indiatimes.com/industry/energy/oil-gas/lpg-price-hiked-by-rs-144-5-per-cylinder/articleshow/74096745.cms.
[2] Frequently Asked Questions (FAQ), Petroleum Planning and Analysis Cell, https://www.ppac.gov.in/content/137_3_Faq.aspx.
[3] "LPG Price is Derived based on International Market Price", Press Information Bureau, Ministry of Petroleum and Natural Gas, February 13, 2020.
[4] PAHAL-Direct Benefits Transfer for LPG (DBTL) Consumers Scheme, Ministry of Petroleum and Natural Gas, http://petroleum.nic.in/dbt/whatisdbtl.html.
