Modi's LPG subsidy 'Give it up' scheme will bring inflation down?

Prime Minister Narendra Modi's 'Give it up' drive coaxing citizens to give up their LPG subsidies will help in bringing down consumer price index (CPI) inflation in a course of time, SBI said in a research report.

These LPG subsidies will then be used to provide a gas connection to each house in rural areas.

“We believe that the Government push in providing LPG gas to each family in the rural areas will reduce the use of firewood in the future,” the report said

CPI inflation increased to 5.39% in April on a year-on-year basis compared to 4.83% in March mainly on the back of higher food inflation.

LPG contributes about 2 bps to CPI inflation. As against this, firewood and chips contributes about 15 bps to the inflation index. With the government providing one LPG gas connection per house in rural areas, the use of firewood will come down. “We estimate that this may reduce the inflation around 8-10 bps in the course of time,” the report said.

Narendra Modi requested Indians to voluntarily give up their LPG subsidies on March 27, 2015. Since then, government data shows that over one crore people gave up their benefits which will now be made available to houses in rural areas. During the initial announcement, Modi had said that if 2.8 lakh people give up their subsidy, it will lead to a benefit of atleast Rs 100 crore.

The SBI report mentioned that overall inflation is at low level but contribution from rural and urban areas is not equal. "Rural inflation has not fallen as much as urban inflation and the 'excess inflation' that the rural India is facing is apparent across major sub-categories like fuel, core and food, except in pulses & products."

Apart from benefits reaped from new LPG connections in the rural areas, the report mentioned that “banning the sale of alcohol, as it affects the rural livelihood conditions, will have an additional 5 bps downward impact on the overall inflation.”

Over a point of time, the prices of pulses will also decelerate, the report says. This will provide the Reserve Bank of India an opportunity to cut rate by 25 bps. Also, adequate amount of rainfall in FY17, as is estimated by government and private weather prediction agencies, will also help in reducing the CPI in the year.