Download Fossil Fuel Subsidy Reform: Cash Transfers for Kerosene and LPG

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
Fiscal Subsidy
Sharing of under-recoveries by
upstream companies
Under-recoveries
(in Rs crore)
OIL, 7351
Year
PDS
Kerosen
e
Domestic
LPG
PDS
Kerosene
Domestic
LPG
2008-09
974
1714
28225
17600
2009-10
956
1814
17364
14257
2010-11
931
1974
19484
21772
2011-12
863
2137
27352
29997
GAIL, 3183
ONGC, 44466
Note: This is the total under-recovery sharing between the oil
companies and not just the quantum of under-recoveries on LPG and
Source: Petroleum Planning and Analysis Cell
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
100
50
Monthly Per Capita Expenditure Class (MPCE) (in Rs.)
900
800
700
600
500
400
300
200
100
0
1477 and above
1144-1477
974-1144
853-974
765-853
685-765
613-685
537-613
450-537
0-450
0
Monthly Per Capita Expenditure Class (in Rs.)
3166 and
above
2303-3166
1843-2303
1543-1843
Urban
1307-1543
–
Multiple connections
Non-surrendering of LPG connections by PNG
customers
Usage of LPG cylinders in vehicles and in
commercial establishments
150
1114-1307
–
–
200
945-1114
Leakages of LPG subsidies are also very high
250
797-945
•
Since penetration of LPG to rural areas and
poorer households is limited, larger proportion
of the subsidy accrues to the rich
Rural
300
642-797
•
Dual prices of LPG exist – those for the
domestic/household consumers are subsidised
whereas industrial LPG is sold at much higher
prices
350
0-642
•
LPG distribution is managed by the oil
companies themselves
Number of households (per
thousand)
•
Number of households reporting LPG
as primary cooking fuel (per thousand)
Mechanism of subsidy provision –
Domestic LPG
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
Merits and Limitations of Direct
Transfers
 Ensuring consumption
of merit goods
 Exposure to price
volatility
 Impact on inflation
Limitations
 Reduction in PDS
leakages
 Expansion of choices
for the poor
 Greater public
accountability and lower
administrative costs
 Other co-benefits
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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