Subsidy reform in India

Targeting inequity, nudging behaviour

Dr Arunabha GhoshCEOCouncil on Energy, Environment and Water

OECD Aligning Policies for Transition to a Low-Carbon EconomyBogor, Indonesia 4 November 2015

© Council on Energy, Environment and Water, 2015

STRICTLY NOT FOR CIRCULATION

CEEW: one of South Asia’s leading think-tanks

2

Energy access is a primary driver of policy

3 SOURCE: CEEW/ Jain et al (2015)

• Petrol and diesel subsidy was removed in June 2010 and October 2014, respectively

• Subsidy on power is governed by states, and varies significantly across states

How large are energy subsidies in India?

4

Actuals 2012-13

Actuals 2013-14

Revised 2014-15

Budget 2015-160%

10%

20%

30%

40%38%

34%

23%

12%

Petroleum subsidy as share of direct central subsidy

2011-12 2012-13 2013-14 2014-15 -

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Energy Subsidy in India

Power (State subsidy) LPG Kerosene

Cror

e (IN

R)

Milli

on (U

SD)

SOURCE: Compiled from multiple sources by CEEW

Who benefits?

5 SOURCE: Ghosh and Ganesan (2015); CEEW/ Jain et al (2014); CEEW/ Jain & Ramji (forthcoming)

All India0%

20%

40%

60%

80%

100%

15%

47%

38%

Share of LPG subsidy to income groups

Top 20%Middle 50%Bottom 30%

Rural Urban0%

20%

40%

60%

80%

100%

22%

46%

52%

44%

26%9%

Share of kerosene subsidy to income groups

Top 20%Middle 50%Bottom 30%

• Petrol subsidy was removed in June 2010– Annual saving of ~ USD 1 bn

• Diesel was de-regulated in October 2014– Annual saving of ~ USD 10 bn

• In 2014-15, GOI implemented the world’s largest cash subsidy transfer scheme (DBTL) to improve the efficacy of LPG subsidy distribution

– 144 million consumers enrolled in a span of six months (~90% of active consumer base)

– Expected annual saving ~ USD 1-2 bn– Provides foundation for further reforms

• #GiveItUp – A government campaign, to urge LPG users who can afford to pay the market price to voluntarily surrender their subsidy

– 4 million LPG users has given up their subsidy since the launch of scheme on 27 March ‘15

– Saving are directly linked to provide more subsidised connections to deserving population

• Clean energy cess on coal – National Clean Energy Fund– Currently at INR 200 per tonne of coal (quadrupled since July 2014)

What reforms with what impact?

6

• Power– 100% metering of domestic and agricultural connection– Progressively reducing the gap between cost of supply and average tariff

charged

• Kerosene– Government is considering introducing DBT for PDS kerosene– Need to slowly phase out subsidy on kerosene, and provide households

with alternatives to meet the same end needs in a better manner

• LPG– Post utilising the full potential of #GiveItUp campaign, there is a need for

mandatory exclusion of well-to-do households

What next for reforms?

7

THANK YOU

http://ceew.in

8