Direct Benefit Transfer in cooking fuels: Redefining subsidy

by Basudha Das, TERI | The Energy and Resources Institute
Tuesday, 2 December 2014 08:26 GMT

Subsidies were introduced on kerosene and LPG to provide basic lighting and cleaner cooking options at affordable rates for the poor. Source: TERI

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The reintroduction of DBT scheme is a welcome signal that subsidy targeting is back on the policy agenda


The Union Government’s recent move to deregulate diesel prices is just the beginning of a new era of economic reforms, say experts. The next obvious step would be to bring down the under-recovery in domestic LPG and kerosene to reduce the government’s subsidy burden and open up the Indian economy further.


The under-recovery on domestic LPG has more than doubled to Rs 46,500 crore in 2013-14 from Rs 19,500 crore in 2010-11, following robust demand growth of 5-9 per cent during the period. In the case of kerosene, the under-recovery for the second fortnight of October 2014 will be Rs 31.22 per litre from Rs 32.67 per litre in September.


The government’s decision to reintroduce direct benefit transfer (DBT) for LPG in 54 districts from mid-November has been a positive move in this direction. The subsidy per cylinder will now be fixed and even people not coming under the Aadhaar scheme can have the subsidy transferred to their bank accounts. This will help reduce leakages and subsidies can further be targeted at the poor.


At a workshop ‘Reforming LPG and Kerosene Subsidies: Short-term priorities and longer-term ambitions’ organised by the Dr R. K. Pachauri-led The Energy and Resources Institute (TERI), experts observed that the government’s move to revive the DBT system is a welcome move.


The experts said that while subsidies in LPG and kerosene aim to ensure accessibility at affordable rates, there are several gaps in the system. This incentivizes diversion to black markets and leads to increase in the subsidy burden. Therefore, subsidies also need to be better targeted to ensure maximum benefits reach the targeted population and bring in more transparency in the delivery system.


Around 31 per cent of the population of the country uses kerosene as its main source of lighting, while 28 per cent still depend on kerosene for cooking. Subsidies were introduced on kerosene and LPG to provide basic lighting and cleaner cooking options at affordable rates for the poor.


According to the Kirit Parikh report on pricing of diesel, LPG and kerosene, there is unequal distribution of subsidies across rural households, as the proportion of subsidies that go to the poorest quintile is just 0.07 per cent as compared to 52.6 per cent for the richest quintile.


Direct Benefit Transfer Scheme: Case study in Alwar


The DBT was first announced in the Union Budget 2011-12. It stated the Government’s aim to move towards direct transfer of cash subsidy for kerosene, LPG and fertilizers.  In December 2011, the Government of Rajasthan launched a pilot scheme in Kotkasim, Alwar, to test a system of direct transfers of cash subsidies to bank accounts of beneficiaries. In the case of LPG, the DBT was launched in 20 districts in July 2013.


Under the proposed system, the fuel would be bought from the ration shop or LPG distributer (on delivery) at the full (unsubsidised) market price, after which the subsidy amount would be electronically transferred to the beneficiary’s bank account.


“Subsidies generally distort consumption patterns. While there is a case for protecting certain sections of people from high prices of essential commodities, direct transfer of the benefits are always preferable to other schemes for ensuring such protection,” said Mr Prabir Sengupta, Distinguished Fellow, TERI.


In an attempt to test the impact and efficacy of DBT, TERI undertook the evaluation of the pilot project for PDS Kerosene in Kotkasim, Alwar. The outcome of the study is based on structured interactions with different stakeholders covering district officials, key personnel (banking officials, oil market company officials), dealers/local distributers, and affected households. The survey included both APL and BPL households.


Observations: DBT a welcome move


Kerosene sales dropped drastically in the first six months (December 2011 to June 2012). The price of kerosene increased from the subsidised retail rate of Rs 17.5 per litre to Rs 51.22 per litre. This decline could be majorly attributed to the success in plugging diversion of kerosene for non-household purposes and the usage being limited to those who actually used it for lighting or at times cooking purposes.


However, there are some major issues that still need to be addressed, including the fact that many among the target group did not have bank accounts. New accounts for the remaining beneficiaries were opened after the launch, leading to a delay in transferring the subsidy into accounts.


Another major lapse was the lack of awareness of banking-related mechanism among the beneficiaries. Misconception on the delayed transfer of subsidy taken as no-transfer dissuaded many households from purchasing kerosene.


“A crucial factor which caused the delay in implementation of the scheme was the way the information about the scheme percolated to the intended beneficiaries. Although awareness camps were reportedly organised three months prior to the launch of the scheme, lion’s share (89 per cent) of the households surveyed revealed that they got to know of the scheme only after its launch,” says Dr Kaushik Ranjan Bandopadhyay, Associate Professor, Department of Business Sustainability, TERI University.


However, in Kotkasim, electricity access stood at an average of 12-14 hours a day. Thus, it implied a relatively high price elasticity of kerosene as a source of energy. This led to changes in consumption as soon as the prices were increased.


The way ahead is to gradually phase out upfront subsidy on a time-bound basis and instead opt for targeted direct benefit transfers using Aadhaar and other foolproof mechanisms. The idea ought to be to move to a competitive market price rather than a distorted subsidised price that is perverse incentive for arbitrage and artificial shortages. In tandem, we need to genuinely open up LPG marketing so that multiple players can competitively seek custom and, in the process, drive down costs by improving logistics and supply.


“The DBT on LPG should not be placed in a half-baked manner as the failure to implement the scheme because of lack of an appropriate functional mechanism of financial inclusion this might just turn out to be regressive and may lead to a shift to unclean fuel or biomass thus frustrating the very objective of providing access to modern energy source for cooking. A recent study carried out by Global Subsidies Initiative, International Institute of Sustainable Development to evaluate the pilot DBT scheme on LPG in Andhra Pradesh and presented at the workshop bears ample testimony to that,” says Bandopadhyay.


The Narendra Modi government’s decision to reintroduce the DBT scheme for the supply of cooking gas, after its withdrawal in March this year, is a welcome signal that subsidy targeting is back on the policy agenda. Unlike its UPA avatar, cash transfers will now be based on LPG consumers providing their bank account numbers, rather than Aadhaar numbers, to distributors.


Transfer of subsidy amount to bank accounts, regardless of Adhaar linkage, will help curb diversion of LPG cylinder (black market) that was falsely reflecting the high sales figures. With the immediate plugging of this leakage, the sales are likely to see a decline in the cylinder sales in the initial months. Overtime, as only those eligible for the subsidized cylinders (available at market rates) will make purchases, the LPG Sales in the year could stabilize.