Session 2: Environment, Energy, Urbanisation & Infrastructure (2)

Session 2 was chaired by Dr. Pronab Sen (Country Director IGC India Central) and Anil Jain (Planning Commission of India) was the discussant for the session. The presentations in the session include ‘How urban is India? ’ by Arindam Jana (Indian Institute of Human Settlements) and ‘Leakage in fuel subsidy: Evidence from Direct Benefit Transfer for LPG policy in India’ by Prabah Barnwal (Columbia University).

‘How urban is India?’ presents research findings on whether the parameters used in the Official Census to define urban settlements to capture the true extent of urbanisation in India. According to the official census, the three conditions that must be satisfied for settlements to be classified as urban are (a) Population greater than 5,000 persons (b) population density greater than 400 persons per square kilometre and (c) at least 75% of male main workers involved in non-agricultural pursuits.

The sensitivity tests of the parameters conducted by the authors show that population size and labour conditions have a limiting effect on declaring densely populated areas ‘urban’. In addition measurement errors are likely to arise due to sensitivity to process due to ex ante identification of “urban” settlements by Census.

The author asserts that the characterisation of extent and location of ‘urban’ India important, especially the part that is overlooked because these are important in urban policy and infrastructure finance discussions. There are important policy implications in case of large public sector programs like JNNURM, NREGA, etc. Moreover, small change in percentage of urban population would imply large changes in resource allocations. The research finds that the extent of “urban” India is sensitive to definition of urban settlement and the definition in itself is hard to defend.

The research is ongoing and the authors will undertake settlement level analysis for all India, estimate the metrics at various levels of geographical aggregation. The authors also propose ddefining rural-urban as a range between 0-1 rather than the existing binary: 0-truly rural, 1-truly urban, and all settlements that fall in the errors forming the range between 0 and 1.

Comments were received on the urban settlement criterion of economic activity in light of the vast improvement in connectivity in India which allows agriculture related occupation possible even when one is living in urban like settlements. In addition, authors must consider that most male hold more than two occupation on average when conducting the sensitivity test of parameters.

‘Leakage in Fuel Subsidies Evidence from Direct Benefit Transfer for LPG (DBTL) policy in India’ presents results of an evaluation of DBTL policy on how effective it was in controlling subsidy diversion, effect on recorded household LPG consumption and on black-market prices of LPG.

The identification strategy for estimating the causal effect of DBTL policy rests on phase wise rollout of the DBTL. The paper finds that introduction of DBTL policy is effective in reducing domestic LPG purchase (and thus the subsidy burden) by about 12 to 18% based on household transaction data. Since it includes impact on total domestic LPG refills (subsidized as well as non-subsidized), estimates indicate significant reduction in subsidy diversion. In addition, supporting evidence from survey data show that the impact on leakage is reflected well in LPG black market; DBTL roll back brings down black-market prices by about 15% in the DBTL districts.

The author concludes that introduction of DBTL policy is effective in reducing subsidy burden by controlling leakage. If effectively implemented, DBTL may save more than Rs.6000 Cr ($1 billion).However, frictionless implementation of DBTL must be paid due attention before government considers reintroduction.

Comments were received on the existence of three different price points for LPG (subsidised, non- subsidised and commercial end user price) is problematic as it provides an incentive for black market activity and subsidy diversion even with a DBTL policy in place. The large difference between subsidised and non-subsidised price may result in higher bargaining power of LPG delivery agents. The government is very keen to reduce subsidy leakage not only in LPG but also in kerosene and this research will provide insights to policy intervention in this regard.

By Farria Naeem, Country Economist, IGC Bangladesh