Today's Editorial

How LPG subsidy can be redesigned to privilege low-income households

Relevance: GS Paper III

Why in News?

Redesigning the LPG subsidies for the benefit of low-income households is crucial to address the challenges identified in the current system.

 Background:

• Increasing LPG usage of low-income households is central to India’s energy transition.
• A revised version of the Pradhan Mantri Ujjwala Yojana (PMUY), launched in August 2021, aimed to provide LPG access to an additional 10 million low-income households with one-time subsidies for a cooking stove and gas refill.
• India’s LPG refill subsidy policy has evolved rapidly: From a universal subsidy pegged to the market price pre-Covid, followed by no LPG refill subsidy in 2021, to a reintroduction of a fixed refill subsidy for only PMUY households in May 2022.
• The Pratyaksh Hanstantrit Labh (PAHAL) scheme for direct benefit transfer helped reduce the leakage of subsidized gas cylinders to the black market 

Challenges in the LPG subsidy 

• Adoption Rates: The government has recognised that poor households are not using as much gas as expected.
• Before PMUY, 87 % of rural households used biomass to cook since biomass fuels like wood, charcoal, or dung are cheap or free.  
• Since 2016, this proportion has come down significantly, but most rural households are still using biomass. Specifically, usage of LPG refills in PMUY families is only about half of that of non-PMUY homes.
• Refill Uptake: When it comes to increasing the LPG refill take-up of low-income, PMUY households, the current design of PAHAL may not be adequate. 
• Particularly, paying the full refill price (unsubsidised price) upfront makes it difficult for PMUY consumers, who face a “liquidity constraint”, to purchase refills regularly.
• Sensitivity to Subsidies: The low-income households are sensitive to the amount and timing of refill subsidy, even when the post-subsidy price of gas does not change.
• A Rs 100 increase in the per refill subsidy decreases monthly refill consumption by about 25 % for PMUY consumers.
• The likely reason is the liquidity constraint — if the subsidy is high, this means that there is a large gap between what the household has to pay upfront and the net price after the delayed refill subsidy transfer (after five-seven days of refill purchase).
•  Cash-back Nature: The cash-back nature of the refill subsidy is a key factor behind low refill purchases by liquidity and credit-constrained PMUY households.
• Lack of Information & credit constraints: The households are not well informed about the timing and logistics of receiving subsidy transfers. Further, credit constraint, especially since PMUY consumers are more likely to earn their living on a daily or weekly basis, results in binding liquidity constraints.

Way forward:

• Substantive and Targeted Refill Subsidy: It is not only imperative to provide a substantive, targeted refill subsidy to PMUY households but also consider alternative designs of LPG refill subsidy that reduce the immediate cost of purchasing the refill.
• Habit Formation for Sustainable Adoption: A substantive targeted and upfront subsidy may lead to habit formation and thereby a permanent increase in clean fuel take-up, thus allowing for quicker phasing out of the LPG refill subsidy programme.
• Two proposed fintech solutions include:
• Electronic payment of the subsidy amount to the dealer at the point of refill purchase by the PMUY consumer, with consumer consent obtained through automated messages.
• The use of the digital rupee (e-RUPI), a purpose-specific digital currency launched by the RBI. This would involve providing a digital voucher worth the subsidy amount to PMUY users in advance via SMS or QR code, ensuring the subsidy is used only for LPG refills.
• Integration of Digital Technology: Given that an upfront subsidy transfer can increase the demand for LPG refills significantly, it becomes important that the Ministry of Petroleum and Natural Gas and Ministry of Finance combine digital technology with PAHAL and PMUY targeting.

Conclusion:

Considering the health and time-saving benefits, particularly for the women and children in low-income families, the benefits of removing the delay in subsidy transfer are likely to be huge, even without any increase in the fiscal burden. Thus, revamping LPG subsidies with targeted approaches, fintech solutions, and digital integration can pave the way for sustainable clean fuel adoption, positively impacting the well-being of low-income households.

Mains PYQ

Q. In what way could replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss. (UPSC 2015)