After the success of Direct Benefit Transfer (DBT) for liquefied petroleum gas (LPG)/cooking gas, the government has now decided to launch DBT for kerosene (DBTK), starting with pilots in the State of Jharkhand. While the move is well-intentioned, it may not be simple to implement at scale, and may even fail to eliminate the diversion of subsidized kerosene that it intends to.
The biggest hurdle is the lack of a streamlined and unified digital consumer database, which formed the backbone of the robust and rapid implementation of DBT for LPG. Here, the entire database across India was managed by just three public sector oil marketing companies, which are directly under the Ministry of Petroleum and Natural Gas. This enabled easier coordination for a nationwide roll-out of the scheme. In comparison, the database of subsidized kerosene beneficiaries falls under the Public Distribution System (PDS), which is managed and maintained by each State government. Coordination among the large number of State-level actors, especially in the case of a non-digitized PDS beneficiary database, can create barriers. While e-PDS is being implemented across India, a digital PDS beneficiary database is not yet available for all the States to enable implementation of DBTK.
The second hurdle is the political economy associated with subsidized kerosene. While the Center burns the fiscal impact of subsidy, the States determine who gets the subsidy and to what extent — in terms of the quantum of subsidized kerosene. This is an important political currency for State governments. Thus, political alignment of States to buy into the idea of DBTK is critical in ensuring effective implementation of the scheme. The good news is that many States have expressed interest in conducting the pilot, which reflects the remarkable efforts made by the Center towards aligning the States, including those governed by the Opposition.
Issue of diversion
However, even if the government overcomes these hurdles, a major drawback is the limited ability of DBTK to reduce incentives for diversion. Currently, subsidized kerosene is mainly diverted as a substitute or as an adulterant to diesel. Given the significant Central excise and State taxes on diesel, its market price remains much higher than the non-subsidized price of kerosene. Analysis by the Council on Energy, Environment and Water (CEEW) shows that unless the government restructures the market price of kerosene, the price differential between unsubsidised kerosene and diesel would be in the range between Rs.18 and Rs.32 per litre — varying across States. Such an incentive would still be significant for middlemen as well as end consumers to divert the fuel as diesel substitute.
Another challenge is in ensuring that the subsidy is accessible to its major beneficiaries — poor households. The Pradhan Mantri Jan-Dhan Yojana (PMJDY) has succeeded in providing bank accounts to a substantial number of households, accessing the subsidy amount is still not easy for several poorer households, who may, at times, lose their potential day wage in withdrawing this subsidy from far-located bank branches.
While the pilots will provide valuable insights to the government in assessing DBTK’s impact on kerosene diversion and on households, it is important to devise a more pragmatic and sustainable solution to reform kerosene subsidy, improving both the welfare of poor beneficiaries as well as the effectiveness of the fiscal expenditure.
Promoting alternative fuels
The CEEW’s analysis of National Sample Survey Office data highlights that kerosene is predominantly used as a lighting fuel in rural India, with less than 1 per cent of households using it as a primary cooking fuel. In urban-poor households, it is used for both lighting and cooking. A recent report by the CEEW shows how shifting from kerosene to alternatives such as solar-assisted solutions for lighting and LPG for cooking could be economically beneficial for both the government as well as households. The shift would provide households with much better end-services and avoiding the adverse health impacts associated with kerosene use. Our analysis suggests that such a transition could result in an annual saving between Rs.8,000 and Rs.12,000 crore to the exchequer. Moreover, there is a bottom-up demand for such a change. The largest energy access survey in India, conducted by the CEEW and Columbia University, U.S., shows that 78 per cent of rural households in six major States are willing to adopt solar-based lighting solution in lieu of a reduction in their kerosene subsidy.
As LPG is a clean and efficient fuel, it is rational to continue subsidizing it for the underprivileged who cannot afford it otherwise. However, with energy security and clean energy access high on India’s priorities, we must look beyond kerosene to provide cooking and lighting solutions to poor households, while ensuring affordability, reliability and universal availability of these alternatives. The government has been persistently focusing on structural reforms in various sectors of the economy, and moving away from subsidized kerosene, and envisioning a kerosene-free India would be one such visionary step.