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

Source: This post has been created based on the article “How LPG subsidy can be redesigned to privilege low-income households” published in “Indian Express” on 24^th February 2024.

UPSC Syllabus Topic: GS Paper 2 Social Justice – Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

News: The article discusses the issues with the design of the existing LPG refill subsidy programme and how they can be tackled.

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, aims to provide LPG access to an additional 10 million low-income households with one-time subsidies for a cooking stove and gas refill.

However, poor households are not using as much gas as expected. Most rural households are still using biomass.

What are the issues with the design of the existing LPG refill subsidy programme?

1. Paying the full refill price (unsubsidised price) upfront makes it difficult for PMUY consumers, who face a liquidity constraint, to purchase refills regularly.
2. The data show that low-income households are sensitive to the amount and timing of refill subsidy, even when the post-subsidy price of gas does not change.
3. Households are not well informed about the timing and logistics of receiving subsidy transfers.
4. Credit constraint, especially since PMUY consumers are more likely to earn their living daily or weekly, results in binding liquidity constraints.

According to the author, a 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.

How can we shift to an on-time subsidy transfer without leakage of benefits?

There are the following fin-tech-based solutions for reducing the temporary financial burden of the purchase of LPG refill and ensuring that low-income consumers do not have to pay the subsidy amount out of pocket:

1) Electronic payment of subsidy amount to the dealer/deliveryman at the point of refill purchase by PMUY consumer. Upon confirmation of the subsidy transfer, both the delivery agent and consumer should receive a message notifying it, so that the delivery agent can’t charge more than the subsidised price.

2) Use of digital rupee (e-RUPI): The recently launched, purpose-specific digital currency by the RBI fits particularly well, where a digital voucher worth the subsidy amount can be provided to PMUY users beforehand via SMS or QR code.

3) RUPAY debit card (issued with Jan Dhan accounts) can also be used for advance transfer of the refill subsidy.

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 Pratyaksh Hanstantrit Labh (PAHAL) and PMUY targeting.

Question for practice:

What are the issues with the design of the existing LPG refill subsidy programme? How can we shift to an on-time subsidy transfer without leakage of benefits?