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'Govt must explore new subsidy delivery mechanism'

BS Reporter/New Delhi 21 Aug 12 | 12:56 AM

The government should explore new technology-aided options to improve the mechanism of subsidy delivery and to ensure the subsidies reach the intended beneficiaries, according to a TERI report prepared for International Institute for Sustainable Development. Such measures would also curb inefficient and illegal usage of highly subsidised fuel.

The report revisits and reviews the existing mechanism of subsidy delivery through the Public Distribution System (PDS) and examines the possibility of using cash transfers as an option for fossil fuel subsidy reform. As a country highly dependent on imported crude oil, it is crucial for India to ponder on the appropriate delivery mechanism of petroleum subsidies. “The growing cost of underrecoveries and the economy-wide ramifications of the ad hoc pricing policy have brought about the urgent need to reform pricing of petroleum products, since each year of delay is adding significantly to the costs borne by the government, the oil sector and the economy in general," the report said.

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On the basis of some approximate calculation carried out in the report, it has been observed if the price of PDS kerosene had been deregulated in 2010-11 and the sum of under-recoveries and subsidies saved on this fuel was used to finance cash transfers to all BPL families, each household could have potentially received between Rs 1,565.6 ($34.34) annually (if 50 per cent of the amount saved was redistributed) and Rs 3,131.14 ($68.70) (if all of the amount saved was redistributed) per annum.



For domestic LPG, calculations have been made based on the amount of subsidies accruing to each expenditure decile on the basis of household level NSSO data for 2009-10. The figures show that the approximate amount that could be saved by capping subsidised cylinders at 8 a year works out to more than Rs 4,000 crore ($897.21 million), which is 17 per cent of the total subsidies and under-recoveries on LPG incurred in FY11.(PETROLEUM PRICING: HOW IT WORKS IN OTHER COUNTRIES)

In view of the complex existing system of subsidy delivery and the current state of technology and enabling infrastructure, this report has divided its recommendations into short-term and long-term. The short-term recommendations point to need for more pilot studies, cost benefit analysis on cash transfers and capping of subsidised cylinders. The long-term recommendations suggest implementing cash transfer scheme contingent upon results of pilots, designing better BPL surveys, increasing financial inclusion, indexing payments to changes in price level, calibrated decontrol of LPG prices and improving supply chain of PDS kerosene and domestic LPG.

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