Editorial of the Day (24th Feb): Design of a Subsidy

Table of Contents

Context: India launched the Pradhan Mantri Ujjwala Yojana (PMUY) scheme in 2016 which successfully increased access, but usage of LPG refills remained low among PMUY beneficiaries compared to non-PMUY households.

Challenges against the Design of a Subsidy

Cash-back subsidy: The current “PAHAL” scheme where the subsidy is deposited later discourages refill purchases by liquidity-constrained PMUY households. They face an upfront cost and have to wait for the delayed reimbursement.
Lack of awareness: PMUY beneficiaries often lack awareness about the timing and process of receiving subsidy transfers.
Credit constraints: Many PMUY households are daily or weekly wage earners, facing limitations in accessing credit, further hindering their ability to afford upfront refill costs.

Impact of Subsidy

PMUY households use significantly fewer LPG refills compared to non-PMUY households, despite the program aiming to increase clean fuel usage.
This continued use of biomass fuels like wood and charcoal has negative health and environmental consequences.

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Solutions Proposed for Subsidy

Targeted and upfront subsidy: Providing a substantial, upfront subsidy directly to PMUY households can lead to:
- Increased refill purchases: Studies show a rise in LPG consumption when recipients receive the subsidy in advance.
- Habit formation: Upfront subsidies may encourage long-term clean fuel use, potentially allowing for phasing out the program eventually.
Fintech solutions: Two options are proposed to reduce the upfront financial burden and prevent leakage of benefits:
- Electronic payment of subsidy: Upon confirmation, the subsidy amount is transferred electronically to the dealer/delivery person at the purchase point, ensuring the correct price is paid.
- e-RUPI vouchers: Digital vouchers worth the subsidy amount can be provided to PMUY users beforehand, redeemable only at LPG distributors.
Alternative transfer methods: RUPAY debit cards linked to Jan Dhan accounts could also be used for advance subsidy transfer.

Next Steps

Combining digital technology with existing programs like PAHAL and PMUY targeting can improve LPG refill uptake among low-income households.
Considering the health and time-saving benefits for women and children, especially, the urgency for addressing the subsidy transfer delay is emphasised.