The Hindu Business Line : Displacing conventional fuels reduces energy/GDP ratio

THE kitchen fuel used by more than half of all Indian households is still firewoord. Another 20 per cent use either crop residues or dung cake. This is one reason why the energy/GDP ratio has not been falling as fast as it could have.

As shown in the accompanying table the displacement of conventional energy sources (in theory largely renewable) by fuels such as coal, LPG, electricity and natural gas has been the primary source of the fall in the energy intensity of the economy over the past five decades.

The Department of Economic Affairs' (DEA) paper on Central Government Subsidies (copy available on the Finance Ministry's Web site) opposed a drop in kerosene subsidy on the grounds that, though used mostly by the urban `rich', a hike in prices would also hurt the rural poor for whom kerosene is the `main source of energy for lighting'. According to the 2001 Census, 77 million rural households (ie 56 per cent) used kerosene to light up their homes.

For LPG, the DEA suggested removal or at least reduction of subsidy in a phased manner. Actually, as many as 7.8 million rural households used LPG in 2001, in part because kerosene is not easily available in villages. Rural households thus accounted for a large chunk of the 33.6 million LPG-using households nationwide.

The DEA paper stated that clean fuels are `environment friendly', and on this count went so far as to contemplate the provision of cash transfers to the poor to compensate for the reduction or elimination of subsidy on these fuels. This policy option, however, was immediately dismissed because cash transfers were likely to be diverted to other uses, and might actually increase the consumption of firewood. The fact is that `clean' fuels apart, a shift away from non-commercial to commercial energy sources needs to be encouraged because it reduces the energy intensity of the economy: clean fuels are also more efficient in the extraction of energy.

A goal which is important enough to think of subsidising by cash transfers, is important enough to think of subsidising through commodity-specific subsidies, which do not involve as great a risk of diversion of the subsidy to other uses. That such a decision is also politically convenient is another matter.

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