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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 THANK YOU