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

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

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

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

  2. 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

  3. 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)

  4. Subsidies on LPG and kerosene Quantum of subsidies Sharing of under-recoveries by upstream companies 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 Source: Petroleum Planning and Analysis Cell

  5. 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

  6. Mechanism of subsidy provision – Domestic LPG

  7. 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

  8. Mechanism of subsidy provision – PDS kerosene

  9. Direct Transfers • International experience from Brazil, Indonesia, Mexico and now even Iran • Some cash transfer schemes in India: • JananiSurakshaYojana • BalikaSamridhiYojana • 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

  10. Merits and Limitations of Direct Transfers

  11. Design Elements Challenges Design Elements and Challenges

  12. 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

  13. 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

  14. 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

  15. Thank you

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