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fuel subsidy

The things we do: Nudging people to give

Roxanne Bauer's picture

Man delivers gas cylinders in IndiaIn an appeal to civic duty, the Government of India is asking citizens to forgo a gas subsidy they receive so that gas cylinders can be transferred to the less fortunate. To encourage Indians to "Give It Up," the government called on business leaders to set an example and made the procedure extremely easy.

India recently launched an ambitious cash transfer program to help small businesses and households buy fuel.  Under the plan, consumers of liquefied petroleum gas (LPG), commonly referred to as propane or butane, receive a cash subsidy in their bank accounts to buy gas cylinders at market price.

Once joining the scheme, the subsidy, which is equal to the difference between the current subsidized rate and the market price, is transferred to the consumer’s bank account when he/she orders a cylinder.  Another transfer is then provided at the time of delivery of the cylinder. 

Last November, the Direct Benefit Transfer Scheme for LPG was rolled out across 54 districts, with the rest of the country participating by January 1 of this year. 

The scheme was launched by India’s previous UPA government in June 2013, but it was abruptly stopped earlier this year following court orders.  It has since been modified to exclude the requirement of providing a unique identification number (Aadhaar) to avail the cash subsidy.

The idea behind the direct benefit transfer is that it can ensure that the subsidy meant for the genuine domestic customer reaches them directly and is not diverted. The Government of India hoped to save millions each year by curbing diversions and leakages in the system but also to ensure efficient delivery of subsidies to the target beneficiaries— the consumers.

Who benefits from fuel price subsidies?

Punam Chuhan-Pole's picture

Over half the countries in Sub-Saharan Africa subsidize fuel to protect consumers from high and volatile prices. But fuel subsidies are neither cheap nor likely to be sustainable (see the full analysis in the new Africa's Pulse). 

Data for 2010-11 show that fuel price subsidies consumed, on average, 1.4 percent of GDP in public resources: The fiscal cost in oil exporters was almost two-and-a-half times that in oil importers. In the face of high (and rising) world fuel prices, a number of countries have raised domestic prices to stem fiscal costs.  

For example, Ghana raised fuel prices by about 30 percent in January 2011. The Nigerian government removed the subsidy on gasoline this January, although a portion of the subsidy was subsequently reinstated.  With oil prices likely to remain elevated, fuel subsidies will continue to weigh on government budgets in Africa.

But who benefits from fuel price subsidies?  

Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.