Targeted cash transfers is the preferred approach : IMF
It gives beneficiaries the flexibility to purchase the level and type of energy that best suits their needs, the report says
New Delhi: The International Monetary Fund (IMF) paper on energy subsidy reforms released on Wednesday said that targeted cash transfers are the preferred approach to compensation.
In a paper titled Energy subsidy reform: Lesson and implications, IMF said, “Targeted cash transfers or near-cash transfers (vouchers) are the preferred approach to compensation. Cash transfers give beneficiaries the flexibility to purchase the level and type of energy that best suits their needs, and at a time and place of their choosing. They also remove the need for governments to be directly involved in the distribution of subsidized energy to households."
Some of the successful examples illustrated in the report are those of Indonesia and Armenia.
The IMF stand finds resonance with the Congress-led United Progressive Alliance (UPA) government’s direct cash-transfer scheme dubbed as a “game changer". The Union government has already started implementing the first phase of its cash-transfer scheme—dubbed aap ka paisa, aap ke haath (your money in your hand)—in some districts of Madhya Pradesh, Karnataka and Andhra Pradesh, among others, for pension and scholarship programmes.
“Cash transfers give beneficiaries the flexibility to purchase the level and type of energy that best suits their needs, and at a time and place of their choosing. They also remove the need for governments to be directly involved in the distribution of subsidized energy to households," the IMF report said.
The Indian government intends to directly transfer cash subsidies to domestic cooking gas connection holders. The government has capped the annual supply of subsidized cooking gas cylinders to nine per household starting 1 April. There are 140 million liquefied petroleum gas (LPG) connections in the country, of which 99.57% are for domestic use, comprising 14.2kg LPG cylinders, according to official data. The LPG customer population covers around 56% of India’s total.
Based on a new database for 176 countries, the IMF report also estimated that subsidies in 2011 amounted to $1.9 trillion or around 2.5% of the world’s gross domestic product. It also added that the top three subsidizers across the world are the US at $502 billion, China at $279 billion, and Russia at $116 billion.
“Domestic fuel prices in India have not kept pace with rising international fuel costs, resulting in consumer price subsidies," the report said.
Indian government-owned oil marketing companies currently sell diesel, kerosene and LPG at a loss. These losses are estimated at ₹ 1.65 trillion for the current fiscal. However, in an indication of the government’s willingness to address the issue of soaring subsidies, India has significantly reduced the petroleum subsidy outgo for 2013-14 by allocating ₹ 65,000 crore for 2013-14, a cut of 33% from the revised estimate of ₹ 96,879.87 crore for 2012-13.
“The degree to which compensation should be targeted is a strategic decision that involves trade-offs between fiscal savings, capacity to target, and the need to achieve broad acceptance of the reform," the IMF report said.
Pointing out the distortion in targeting of domestic cooking gas subsidies, India’s Economic Survey presented in February said “the reach of subsidies on LPG is highly unequal amongst the poor and rich in rural and urban areas. While there is a significant inequality in the proportion of subsidies received by the poorest and richest households in rural areas, the distribution is more equitable across urban households. However, in both cases, the proportion of subsidies that go to the poor is low."
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