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Direct Bank Transfer will improve delivery system for LPG and Kerosene and reduce the subsidy burden, say Experts

Pune (Sept 18, 2014): The Direct Bank Transfer (DBT) system should be adopted to reduce the subsidy burden and bring in more transparency in the delivery system, said experts at a workshop titled, ‘Reforming LPG and Kerosene Subsidies: Short-term priorities and longer-term ambitions’, which was jointly organized with The Energy and Resources Institute (TERI) and the International Institute for Sustainable Development (IISD).

The workshop brought experts from various sectors thatreviewed the policies and discussed the social, economic and political implications of LPG and kerosene subsidy reforms. Prices of liquefied petroleum gas (LPG) and public distribution system (PDS) kerosene are regulated by the government. While subsidies aim to ensure accessibility at affordable rates, there are several gaps in the system which incentivizes diversion to black markets leading to an increase in the government’s subsidy burden. These subsidies also need to be better targeted to ensure that maximum benefit reaches the targeted populations.

Reforms are, however, underway, particularly in the case of diesel, where gradual increases in diesel prices have resulted in a significant cumulative price increase since early 2013. In contrast, the government has not raised domestic LPG and PDS kerosene prices. Instead, it has experimented with DBT system to plug leakages, diversions and reduce the subsidy burden alongwith improve the delivery systems.

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

MrPravinKumar Agarwal, Senior Fellow, TERI:  “Our first priority is to ensure subsidies only to the genuine consumers and thereafter, move to targeted subsidies. For long term solutions, we should replace LPG cylinders with piped gas connections for urban areas and provide solar lanterns and improved cookstoves to rural households.”

In September 2012, the government introduced a cap on the consumption of subsidised LPG cylinders, restricting households to a maximum of nine subsidised cylinders per annum. However, the DBT scheme was abruptly suspended earlier this year, and the quota of subsidized cylinders was raised to twelve.

After adopting the policy of progressive restricting supply, the government has successfully reduced the PDS kerosene consumption. However, there has been no change in the pricing of subsidized kerosene.

Says Dr Kaushik RanjanBandhopadhyay, Associate Professor, TERI University: “Targeting the poor in a country like India has its own set of limitations and we have already experienced that it with Targeted Public Distribution System (TPDS). Any programme of cash transfer like DBT may sound superior or innovative, but proper readiness assessment coupled with adequate awareness generation and financial inclusion are needed to make such aprogrammesuccessful. Or delivering the desired benefit to the intended beneficiaries could actually make the situation worse.”

Important issues and facts

  1. LPG and kerosene subsidies have been criticized on a number of reasons. They result in a flourishing black market, particularly in the case of kerosene
  2. LPG subsidies are poorly distributed, and do not reach the poorer populations, with most of the subsidy benefit accruing to richhouseholds. Despite their fiscal cost, LPG subsidies have largely failed to allow households inIndia’s poorest communities to adopt safer and cleaner forms of energy use
  3. Direct Benefit Transfer or DBT was launched by the UPA government, which aimed to transfer subsidies directly to the people living below poverty line (BPL)
  4. In the case of kerosene, a number of expert committees have recommended gradual increase in prices, but so far this advice has not been heeded
  5. Prior to the collapse of the DBT programme for LPG, the government had proposed the introduction of electronic payments for kerosene subsidies
  6. However, after state governments raised concerns over kerosene distribution, the plan was scrapped

TERI conducted a survey in Alwar, Rajasthan, to understand the impact of direct transfers to the bank accounts of ration cardholders as a means of distributing PDS kerosene subsidies. The recommendations and findings are as follows:

  1. Sales of kerosene at theFair Price Shops (FPS) for the Kotkasim (Alwar) block fell drastically (from 82 kl in November 2011 to 54 kl during the period between December 2011 and February 2012) during the period of the pilot scheme.
  2. Part of this decline is likely due to the scheme’s success in curbing leakage of kerosene to the black market.
  3. The study raises concerns that the high upfront price of kerosene, poor access to banking facilities and the overall uncertainties associated with the subsidy transfer contributed to households reducing their consumption of kerosene.
  4. It is imperative to properly plan and structure the system of information dissemination, well before the launch of the scheme.
  5. Ensuring opening of bank accounts for all beneficiary households before the launch of the scheme.
  6. Providing higher incentives to the FPS dealers (timely increase in commission and regular communication) in order to ensure optimal penetration of the scheme.
  7. Improving access to banking facilities to villages.
  8. Digitizing the data, records of FPS dealers for more transparency