• UGI USER
  • Feb 26, 2024
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HOW LPG SUBSIDY CAN BE REDESIGNED TO PRIVILEGE LOW-INCOME HOUSEHOLDS

Relevance:

  • GS 2 – Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  • GS 3 – Inclusive growth and issues arising from it.

Why in the News?

  • The Telangana government’s proposal involves paying the subsidy amount of 455 in advance.
    • This payment is directed to the oil marketing companies, ensuring a reduced financial burden on consumers.
  • Instead of depositing the subsidy amount later into the accounts of consumers through the Direct Benefit Transfer (DBT) mechanism, the proposed approach involves upfront payment.

Overview of LPG Usage

Increasing LPG usage among low-income households is pivotal to India’s energy transition goals.

  • Pradhan Mantri Ujjwala Yojana (PMUY):
    • Aimed to provide LPG access to an additional 10 million low-income households.
    • Offered one-time subsidies for cooking stoves and gas refills.
    • Government labeled PMUY as a flagship program.
  • Challenges in LPG Adoption:
    • Despite efforts, poor households are not utilizing gas as expected.
    • Pre-PMUY, 87% of rural households relied on biomass due to its affordability.
    • Although the proportion has decreased since 2016, biomass remains predominant.
  • Role of Pratyaksh Hanstantrit Labh (PAHAL) Scheme:
    • Implemented for direct benefit transfer, reducing leakage of subsidized gas cylinders to the black market.
      • Addressed issues of subsidy diversion that occurred when heavy subsidies were available to all households.
    • Current design of PAHAL, with upfront payment of the full refill price, may not be suitable for PMUY beneficiaries.
  • Impact and Future Outlook:
    • These policy shifts reflect attempts to optimize subsidy distribution and encourage genuine usage of LPG among targeted beneficiaries.
    • Continued policy adjustments may be necessary to further enhance LPG adoption and mitigate challenges in implementation.

Altering Subsidy Programme Design

  • Modify the existing LPG refill subsidy programme to accommodate the needs of PMUY consumers effectively.
  • Aim for a design that provides subsidies in a manner that is financially accessible for low-income households while remaining fiscally neutral.
  • LPG Refill Subsidy Policy Evolution:
    • Initially, a universal subsidy tied to market prices existed pre-Covid.
    • There are liquidity constraints faced by PMUY households in purchasing LPG refills regularly. In 2021, no LPG refill subsidy was in place.
    • May 2022 saw the reintroduction of a fixed refill subsidy exclusively for PMUY households.

Utilizing Consumption Data for Policy Refinement:

  • Analyze LPG refill consumption data from all three oil marketing companies for Indore district over two years (2018 and 2019).
  • Assess the response of PMUY and non-PMUY consumers to refill market prices under different subsidy schemes.
  • Differential Response of PMUY and Non-PMUY Consumers:
    • Identify differences in refill purchase behavior between PMUY and non-PMUY consumers in response to market prices.
    • Understand why an increase in LPG refill MRP (unsubsidised market price) does not necessarily deter non-PMUY consumers from purchasing refills, while it negatively impacts PMUY
  • Effectiveness of Bank-Deposited Subsidy:
    • Evaluate the impact of bank-deposited refill subsidies on PMUY consumer behavior.
    • Assess whether the subsidy increment in tandem with market prices adequately addresses the needs of PMUY households.
  • Policy Adjustments for Improved Utilization:
    • Based on data insights, consider policy adjustments such as staggered subsidy payments, targeted assistance programs, or alternative subsidy delivery mechanisms.
    • Ensure that any changes made are financially sustainable and do not impose additional fiscal burdens.

Addressing Sensitivity to Refill Subsidy Amount and Timing

  • Impact of Refill Subsidy on Consumption:
    • Data reveals that low-income households, especially PMUY consumers, are sensitive to the amount and timing of refill subsidies.
    • A Rs 100 increase in the per refill subsidy reduces monthly refill consumption by about 25% for PMUY consumers.
  • Liquidity Constraint and Subsidy Gap:
    • The large gap between upfront payment and net price after delayed subsidy transfer contributes to liquidity constraints for PMUY households.
    • Lack of awareness about subsidy timing and logistics further exacerbates the issue.
    • Credit Constraints and Income Patterns:
      • PMUY consumers, often earning on a daily or weekly basis, face binding liquidity constraints.
      • Credit constraints compound the issue, hindering their ability to afford upfront refill
    • Need for Substantive and Targeted Subsidy:
      • Essential to provide a substantive and targeted refill subsidy to PMUY households.
      • Alternative subsidy designs should aim to reduce immediate refill purchase costs.
    • Pradhan Mantri Garib Kalyan Yojana (PMGKY) Case Study:
      • PMGKY provided up to three free LPG refills to PMUY beneficiaries between April 1, 2020, and December 31, 2020, with upfront subsidy credit.
      • Analysis indicates a significant spike in PMUY refill consumption in April 2020, with no change in non-PMUY consumption.
      • Observed a 20% increase in LPG usage among PMUY households even after the upfront subsidy ended, suggesting habit formation and permanent clean fuel uptake.
    • Implications for Policy Design:
      • Insights from PMGKY highlight the potential of substantive, targeted, and upfront subsidies to drive long-term behavior change and reduce reliance on refill subsidy programs.
      • Consideration of alternative subsidy mechanisms and awareness campaigns to enhance uptake and sustainability of clean fuel adoption among low-income households.

Shifting to On-Time Subsidy Transfer without Leakage

To ensure timely subsidy transfer without diversion, two fintech-driven solutions can alleviate the temporary financial burden of LPG refill purchases for low-income consumers:

  • Electronic Payment to Dealers/Deliverymen:
    • Subsidy amount transferred directly to the dealer/deliveryman at the point of refill purchase by PMUY consumers.
    • Obtain consumer consent through automated text or voice messages, confirming subsidy transfer.
    • Both consumer and delivery agent receive notification messages to prevent overcharging.
  • Utilizing Digital Rupee (e-RUPI):
    • Leveraging the RBI’s e-RUPI digital currency, provide purpose-specific vouchers to PMUY users via SMS or QR code before refill purchase.
    • Consumers present digital vouchers to dealers/deliverymen during refill purchase.
    • e-RUPI vouchers restricted to specific merchant types (e.g., OMC distributors) to prevent subsidy diversion.
    • Alternatively, utilize RUPAY debit cards issued with Jan Dhan accounts for advance subsidy transfers.

Integration of Digital Technology with PAHAL and PMUY Targeting

  • Ministry of Petroleum and Natural Gas and Ministry of Finance should synergize digital technology with PAHAL and PMUY targeting.
  • Facilitate seamless subsidy transfers and enhance efficiency in subsidy distribution.

Benefits of On-Time Subsidy Transfer:

  • Removal of subsidy transfer delay can significantly increase demand for LPG refills, especially among low-income households.
  • Health and time-saving benefits, particularly for women and children, justify the importance of timely subsidy transfers.
  • The potential benefits outweigh any increase in fiscal burden, underscoring the importance of swift implementation.

 

Source: https://indianexpress.com/article/opinion/columns/how-lpg-subsidy-can-be-redesigned-to-privilege-low-income-households-9177753/

Mains question

Discuss the potential fintech solutions for on-time LPG subsidy transfers to low-income households. Evaluate the role of digital technology in enhancing subsidy efficiency. (250 words)