Fossil Fuel Subsidy Reform: Cash Transfers for Kerosene and LPG subsidies The Energy and Resources Institute August 28, 2012

Outline Scene Setting: –Prevailing quantum of subsidies on LPG and kerosene –Current mechanism of subsidy provision Direct Transfers: An Option for Supporting LPG and Kerosene Subsidy Reform Merits and Demerits of Cash Transfers Design Elements and Challenges of a Cash Transfer Scheme in India Inferences and Recommendations

Subsidies on LPG and kerosene Subsidies are provided to: –Increase affordability of energy for the poor –Protect domestic economy from fluctuating international prices Mechanism for providing subsidies: –Fiscal subsidy – a small pre-determined component of the price provided by the government –Under-recovery – shared by the government, upstream companies (and GAIL) and remaining under-recoveries are met by oil marketing companies (OMCs)

Subsidies on LPG and kerosene Quantum of subsidies Source: Petroleum Planning and Analysis Cell Sharing of under-recoveries by upstream companies Fiscal SubsidyUnder-recoveries (in Rs crore) Year PDS Kerosen e Domestic LPG PDS Kerosene Domestic LPG Note: This is the total under-recovery sharing between the oil companies and not just the quantum of under-recoveries on LPG and kerosene Source: Oil India Limited

Mechanism of subsidy provision – Domestic LPG LPG distribution is managed by the oil companies themselves Dual prices of LPG exist – those for the domestic/household consumers are subsidised whereas industrial LPG is sold at much higher prices Since penetration of LPG to rural areas and poorer households is limited, larger proportion of the subsidy accrues to the rich Leakages of LPG subsidies are also very high –Multiple connections –Non-surrendering of LPG connections by PNG customers –Usage of LPG cylinders in vehicles and in commercial establishments

Mechanism of subsidy provision – Domestic LPG

Mechanism of subsidy provision – PDS kerosene Kerosene is provided through the Public Distribution System (PDS) –Managed by Ministry of Consumer Affairs, Food and Public Distribution at the Centre and thereafter by the respective state level authorities –Sold at Fair Price Shops and Kerosene Oil Depots across the country –Quotas for each dealer are determined Pitfalls of the PDS mechanism –Diversion –Errors of inclusion and exclusion Reform of PDS – Computerisation of PDS

Mechanism of subsidy provision – PDS kerosene

Direct Transfers International experience from Brazil, Indonesia, Mexico and now even Iran Some cash transfer schemes in India: –Janani Suraksha Yojana –Balika Samridhi Yojana –Indira Gandhi National Old Age Pension Scheme Limited cases of replacement of fuel subsidy with direct transfers available for drawing lessons Direct transfer of kerosene subsidy –Pilot in Alwar, Rajasthan –Promising results, need to be tested in other regions

Merits and Limitations of Direct Transfers  Reduction in PDS leakages  Expansion of choices for the poor  Greater public accountability and lower administrative costs  Other co-benefits  Ensuring consumption of merit goods  Exposure to price volatility  Impact on inflation Merits Limitations

Design Elements and Challenges Design Elements Challenges

Recommendations (1) Short term recommendations –More pilot studies to test provision of direct transfers Dearth of prior results on viability and consequences of implementing direct cash transfers Need to expand and scale up as results of current studies in Alwar and Mysore emerge –Value for money and cost benefit analysis Assessing the extent to which the transfer schemes are able to achieve their stated objectives Assessment of the benefits achieved as against the costs incurred –Capping of LPG cylinder consumption Can be done in the short term to reduce the burden of subsidies Creation of LPG transparency portal addresses the logistical requirements

Recommendations (2) Medium to long term recommendations –Introduction of country-wide cash transfers contingent on finding of pilot studies Results from pilot projects will be instrumental in weighing the costs and benefits of cash transfers in India –Indexing payments to price levels To ensure that the value of the transfer does not get eroded after some time –Increasing financial inclusion Providing access to financial infrastructure will be necessary to ensure that transfers can be provided with minimum leakages –Phased decontrol of LPG prices Most LPG consumers currently are the rich urban households and this trend is likely to continue – creating the need for phased decontrol of prices

Recommendations (3) –Improving the supply chain of PDS kerosene and domestic LPG Ease of access to the fuels will be essential Strengthening the supply system to minimise leakages and losses will be very important –Designing better BPL surveys To reduce errors of inclusion and exclusion

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