The ongoing conflict between Iran and the United States is not only choking the Strait of Hormuz, but is becoming a household problem for countries like India, which lean heavily on gas imports. Amidst the disruption, India’s LPG (Liquefied Petroleum Gas) supply has been significantly impacted. The rationing has become discernible through recent incidents of commercial gas cuts, affecting canteens, hotels, and even industrial clusters, which struggle to access and prepare cooked food.
These are creating COVID-like fears of possible worker migration back to villages, as the government prioritises household versus commercial use.The LPG story in India is embedded in the theory of missing markets, or market failure. This occurs when price discovery is not left to market forces. Heavy price intervention by the government, by imposing caps more often than not, accentuates shortages in times of crisis.
Cooking gas in India has two different market segments – in cylinders (LPG, largely a mixture of propane and butane), and PNG (Piped Natural Gas, largely methane). Both of them rely on imported gas passing through the Strait of Hormuz. However, the logistical distribution network differs considerably between the two. It is the difference in policy response and distribution network that creates unequal outcomes. It accentuates shortages in one segment, while keeping the other insulated. A substantial part of Indian households rely on LPG as their primary fuel.
The trend has started changing in recent decades, with PNG penetration that now serves about 5% of the households.The distribution network of LPG makes a classical case of market failure. This occurs when free markets fail to allocate resources efficiently and produce suboptimal outcomes. In India, LPG makes the case for the same, on account of a) heavy subsidisation, b) portability, and c) presence of middlemen. The price caps and subsidisation create distortions. When shortages occur, these get enhanced.
Further, the portability and presence of middlemen amplify inefficiencies by creating cases of hoarding, speculation, and black marketing. This is quite evident from the policy response to nip the grey markets in the bud. Just on March 18, the government conducted about 6,000 raids against black marketing of LPG cylinders post the supply cut. In contrast, the PNG users are heavily insulated because of huge infrastructure costs in laying pipelines and metered networks, as well as no subsidies. The possibility of grey markets is therefore remote.
For LPG users, however, there’s a missing market for piped gas due to these huge entry barriers. The government has long been imploring the PNG users to give up their subsidised LPG cylinders. It has, however, had a limited impact.It is for these reasons that, if the conflict in the Gulf escalates, the gas crisis in India will worsen. The need of this hour is a call for hope. As the Indian public cries out — “Give me hope”, the Indian policy makers have to come up with fast solutions that are durable in the long run.
While continuing to make efforts for consumers to transition to PNG, a quick response could be to subsidise substitution goods like induction stoves and increase electricity subsidies in urban areas. This will enable households to transition to a more efficient energy source and utilisation through the appliances of electricity, which is largely indigenous. This will lift pressure off the gas cylinders, reduce grey markets, and promote electricity usage
The electricity generation in India is also rapidly growing. It is estimated that demand is expected to double from the current 250 GW in 2024-25 to 459 GW, a decade later, primarily due to development, urbanisation, and the building out of data centres. India has also achieved an enviably good mix of renewables in this pie. Today, India’s renewable energy generation (including hydro) accounts for 52.3% of installed capacity. Yet, power generation from renewables is only 26% of the mix.
This gap needs to be narrowed through well-designed storage solutions for off-peak power generation. Recent government data shows that India is not only narrowing the gap between demand and supply but also increasing the renewable generation as part of the mix. Since electricity is a more locally rooted energy source compared to imported LPG, the shift towards induction reduces dependency on geopolitically driven external sources of fuel supply.
The chorus of “Give me hope” can resonate with the alternative of indigenous electricity and alleviate the stresses and market manipulations. It can also give a fillip to Indian manufacturers to scale up the induction appliances sector to make it world class.
Badri Narayanan Gopalakrishnan is an Affiliate Faculty Member, Applied Economics, Boston College, USA; Sarika Rachuri is Faculty Member, ICFAI University, Mumbai