The Government of India during the UPA tenure introduced the Direct Benefits Transfer Scheme. In the words of the Planning Commission (now defunct)- "The purpose of Direct Benefits
Transfer is to ensure that benefits go to individuals' bank accounts electronically,
minimising tiers involved in fund flow thereby reducing delay in payment, ensuring
accurate targeting of the beneficiary and curbing pilferage and duplication." ( See - http://www.dbtmis.planningcommission.nic.in/dbtentry/homepage.aspx)
One such subsidy for which DBT has been implemented is LPGsubsidy. Details can be found at : http://petroleum.nic.in/dbt/#
While the objective of these subsidies is to reduce inequity and allow access to certain essential goods to the poor the earlier mechanism allowed too much of pilferage, administrative costs and , diversion. With DBT the government is expected to save huge amounts and spend taxpayer money better. One estimate of the savings for the previous fiscal puts it as Rs.10,000 crore approx. See :
http://www.livemint.com/Industry/PGCreyRo9L9rCt3Vx3xyBO/DBTL-helps-govt-save-Rs10000-crore-as-illegal-LPG-consumpti.html
But some questions remain. Will the average beneficiary spend the transferred amount on LPG? How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour? Is it necessary for paternalistic intervention in consumption behaviour?
One such subsidy for which DBT has been implemented is LPGsubsidy. Details can be found at : http://petroleum.nic.in/dbt/#
While the objective of these subsidies is to reduce inequity and allow access to certain essential goods to the poor the earlier mechanism allowed too much of pilferage, administrative costs and , diversion. With DBT the government is expected to save huge amounts and spend taxpayer money better. One estimate of the savings for the previous fiscal puts it as Rs.10,000 crore approx. See :
http://www.livemint.com/Industry/PGCreyRo9L9rCt3Vx3xyBO/DBTL-helps-govt-save-Rs10000-crore-as-illegal-LPG-consumpti.html
But some questions remain. Will the average beneficiary spend the transferred amount on LPG? How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour? Is it necessary for paternalistic intervention in consumption behaviour?
81 comments:
Analysis of Direct Benefit Transfer Scheme – C.Yamuna Menon
Direct Benefit Transfer Scheme (DBTS) is to better identify the poor and to help them enjoy the intended benefit. Since the transfer occurs only through Aadhar linked bank accounts it will help in removing fake beneficiaries as Aadhar follows a unique identification method. But, the Aadhar cards are still out of reach for the poorest of the poor. Same pattern is followed in the case of bank accounts also. In turn, the benefits are enjoyed by the creamy layer.
It will also reduce the corruption carried out by middlemen. The direct transfer would reduce government expenditure since there is no requirement of middle bureaucracy to be involved in the scheme to make sure that the people are benefitted. When the purchasing power is directly transferred to the hands of the poor, they may make choices not suitable for them. Also a delay in the transfer of the funds will bring hardships to the people who lead a hand to mouth existence. When the fund is transferred, the poor will spend it on other items and they will consume a wide range of products.
The beneficiaries of the schemes are generally found to be the creamy layer in urban and rural population. The rest who live in poverty are still using conventional fossil fuels. Moreover, they find it difficult to buy the LPG cylinder at market price under the new scheme. The subsidy is transferred only after payment is made when the good is delivered.
The consumption behavior affects differently the rich and the poor. The rich consider the good inevitable and they will be ready to pay a higher price. The consumption will remain unchanged. But, the poor will have to face hardships in acquiring huge amount inorder to buy the good at market price. There will be a decrease in their consumption level. But the overall consumption level will not have a significant change.
There is a requirement of paternalistic behavior in the consumption of LPG since it is a scarce product. Otherwise, a blackmarket for the same will come into effect and richer ones would go to any level to satisfy their needs. This would deny the ordinary men from enjoying their rights to such products.
Unfortunately, only the poor are being affected or regulated by such a scheme.
A major cause of leakages in India is fake beneficiaries in anti-poverty schemes and ghost identity cards. DBTS necessitates the use of Aadhaar, which will result in greater fiscal savings, but it is flawed because it assumes that there is adequate rural infrastructure, connectivity and accessibility to banking facilities for the scheme to benefit its intended recipients.
Can consumption behaviour of the people below poverty level truly be modified by LPG subsidy? I think, yes, the rural consumption of LPG will increase with the subsidy as the social cost of using dung, kerosene, fuel wood is much higher (consuming time and causing indoor pollution).
The Direct Benefit Transfer scheme has been set off with a great aim in mind – easing the lives of the members of the lower strata by speedening the process of transfer of funds to them. The microeconomic analysis of this situation involves the prediction of:
a) Whether the money transferred shall be used for purpose of buying LPG cylinders.
b) How this income transfer affects the consumer behavior.
By way of transferring funds i.e returning income to the consumer in order to implement this scheme, the consumer experiences an apparent increase in purchasing power. This income he has received may not be spent entirely on buying LPG cylinders; he may change his market basket and use a part of the money to purchase another good which gives him greater satisfaction i.e a market basket lying on a greater indifference curve.
Also, the subsidizing of LPG impacts the rich and poor differently. The change in market basket may not be very drastic in the case of a person with greater income as he has enough funds to meet his basic needs whereas in the case of a man of lower income, the probability that the funds received may be diverted to another good of greater value is more. The number of people in middle and lower classes in India is substantially high and therefore, the overall demand for LPG cylinders may decrease.
Such a paternalistic intervention is vital as it not only helps the people of lower economic strata to afford a vital yet expensive good as LPG but also gives them an apparent increase in income which may benefit them in purchasing other goods.
Therefore, by way of the DBTS, the government is intervening and changing individual consumer behavior and may prove successful in bringing down the overall demand of the good.
Analysis of DBTS - VISHAL VANSH
DBTS aims to change the system of transferring subsidies to bring transparency and terminate pilferage. As it is linked to aadhar biometric system , it helps to eliminate fictitious accounts. It will lessen the role of intermediaries. it will also reduce the scope of corruption and leakage to almost nil. It boosts the financial inclusion in rural areas.
But DBTS can become successful only when technology is involved, but 20 percent of people dont know where to apply for aadhar card. Also it is quite a challenging task to find and include real beneficiaries like BPL families and old people etc. and there are far lesser number of banks in rural areas than urban areas.
The consumption behaviour varies more for poor and BPL families than rich families as it would be difficult for them to arrange for money to first buy at true price . For rich, it may affect them but overall consumption more or less remains the same.
There is an exigency of paternalistic behaviour as lpg is a non renewable source of energy and also keeping in mind the huge population that depends on it.
In DBTS, the subsidies are directly send to bank accounts. It is linked to Aadhar Card, so there are no chances of fake accounts. Hence, it reduces the corruption because there is no involvement of middle men.
But DBTS involves technology and the people living in rural areas are not familiar with this technology. The consumption behaviour varies with the people based on their economic conditions. The purchasing power of poor people is low because of their low incomes so they are not capable of buying LPG cylinders at true price. The system benefits the rich people but the poor people and BPL families are still not able to become a part of this system.
There is an exigency of paternalistic behaviour because LPG is a non-renewable source of energy and the time will come when this source of energy will get exhausted.
Spending of transferred amount by the beneficiary depends widely on the income group in which he lies.If the income level is high,a part of amount transferred can be spent in consumption of some other good.But if the income level is not that high and he is one of the consumers of LPG,he would of course spend the money on cylinder assuming that at least one of his requirements is being fulfilled because of the transferred money.
The issue also varies over the class of people who have access over the LPG.Only 65% of the Indian households are under LPG cover.They constitute mostly the urban and the semi-urban classes.The scheme would only help these class of people as they are the one who have access over the cylinder as well as Aadhar and bank facilities.Whereas,the rural parts of India are still dependent on other fuels like kerosene.Also,they lack the facilities of bank accounts,Aadhar cards,etc.
Although,the scheme would help to bring transparency in the system to a great extent and would be an effort towards eradicating corruption and black market by allowing the consumers to minimize the tiers involved in the fund flow,the objective of providing the access of LPG to the poor and rural population would still not accomplish due to the lack of required development in the villages.
LPG is a necessary good therefore in the short run the consumer will not cut down his consumption and therefore despite an increase in price from the earlier subsidized rate to the market price the demand for LPG will not fall down by much.Thus, its demand will remain inelastic.
It is highly unlikely that the average beneficiary under DBT will spend the transferred amount on LPG as the transferred amount will cause an increase in the consumer's income and the budget line will shift parallel towards the right but elasticity of LPG demand being inelastic, the consumer would not increase his consumption of LPG by much and would therefore spend the increased income on other goods.
The mechanism of buying at market price and receiving an income transfer affects individual consumption behaviour differently for different for different income groups.The rich would not get affected much but the poor, many of whom might not be able to afford LPG at the market price will not be able to derive much benefit from the scheme.Since the consumption of LPG cannot be reduced by a great amount ,the poor will start looking towards substitutes.
Paternalistic policies improve consumer welfare by enhancing an individual's likelihood by maximising her own benefit.The government intervention to ensure equitable access to resources is necessary.
The Direct benefit Transfer Scheme has been started by the government to put into place a mechanism for the smooth and transparent transfer of subsidies from the government to the beneficiaries bank accounts. The linking of DBTS scheme with the Adhaar card ensures that the subsidy reaches the poor and the actual beneficiaries. It also helps in checking and terminating pilferage and fictitious account holders. Though the main aim of the DBT scheme is to reduce inequalities and allow access to certain essential goods, penury and illiteracy hinders the success of the scheme.
Under the DBT scheme the consumers are required to pay the market amount of LPG cylinder and the entire subsidy is transferred to their account. Now the question arises that whether the consumer spends entire subsidy on LPG or for some other purposes. In our country LPG does not have high elastic demand. While the high end consumers would continue to keep their demand constant irrespective of the price and probably spend their subsidy on LPG, the low-income groups – lower middle class and poor would prefer to spend a larger chunk of the subsidy on other essential goods. They would likely seek to substitute their demand for LPG with other conventional sources of energy such as firewood etc.
Yes the paternalistic intervention is necessary for certain goods in our country. LPG is the most important cooking fuel in our country. It is only through this subsidy that the government ensures that LPG is within the reach of poorer sections of the society. The paternalistic intervention ensures the equitable distribution of resources and regulation of prices.
While subsidies are meant for the poor it is important to understand if this reaches people 'below the poverty line'. Data from the ministry of petroleum shows that most consumption is in the urban areas - poor and rich.
Also some of you have asked for data on income and price elasticity of demand. In a study ( http://www.mse.ac.in/pub/Working%20Paper%209%20PDF.pdf) the 'uncompensated elasticities of demand' are estimated as below:
Uncompensated demand own price elasticity of demand
Rural Urban
Lower Middle High Lower Middle High
-1.00 -0.98 -0.98 -1.05 -1.01 -0.92
Uncompensated demand Income elasticity of demand
Rural Urban
Lower Middle High Lower Middle High
0.657 0.76 0.606 0.989 0.658 0.556
With this data and data on actual consumption before DBT what would you conclude through indifferent curve analyses? What assumptions would you make in your analysis?
DBTS is an attempt to change the mechanism of transferring subsidies. Through this program the subsidies are directly transferred to the people through their bank accounts, which helps in bringing transparency and terminate pilferage. The average beneficiary won’t spend the transferred amount on LPG; they may consume other products which they consider to be more important than LPG. The individual consumption may decrease as many people might not know what DTBS actually is and most of the rural people may not have the facility of bank accounts and aadhar card. The requirement of paternalistic behavior is necessary as LPG is a non renewable source of energy and it is consumed by a huge population.
Through DBT the govt aims to reduce the pilferage and fake LPG accounts. Earlier when the amount of subsidy was given to companies directly which involved lots of administrative costs, and other problems. Now with DBT govt. Transfers the amount of subsidy directly to bank accounts of consumers.
No, the individual will not spend the whole amount of subsidy which he has received on LPG. As price elasticity of rural lower class people is 1.00 and their income elasticity is 0.657. So the percentage change in price of LPG will be equal to percentage change in demand. And the amount of subsidy received on new demand multiplied with 0.657 will give the amount of income that he will spend extra on LPG. So the consumer would reduce his consumption of LPG.
Archana. D MANDALIA (2213)
An average beneficiary if considered to be an individual who gains only a certain percentage of profit in the DBT Scheme, it could be meant that he has got the means to pay for his LPG Consumption but he has to sacrifice for some other goods, which are less important. Hen when he will be obtaining that transferred money he may use that for his next purchase of LPG or he may even spend that on the good he sacrificed before. It is a question of preference and if the person is financially stable. It might be even that he won't use that money and let be in his account, if he got enough cash with him already.
Considering the 3 points of consumer behaviour we covered in class that is:
(i) Preferences
According to one of the article given, about 65% of Indian population consumes LPG. Since we are living in the 21st century , for most of the urban and semi urban areas, LPG is a necessity ,there cannot be an alternative. The demand seems to be inelastic. Substitutes like solar gas stove and other electric gas stove are not opted for in a short run.
(ii) Budget Constraints
The DBT is such that for people who recently join in get 568 rupees in advance to be able to buy the cylinders at market rate to ensure that his purchasing power is not decrease. Hence there is no issue of income decreasing.
(iii) Consumer Choice
Since the price of the LPG has increased as compared to earlier, for people who did not join DBT it would be tough to buy the cylinders. There might be a decrease in quantity demanded for such type of consumers. But for those who have joined DBT scheme there is no decrease in their consumption (it would be the same as earlier since they are receiving an initial amount for the first purchase of LPG).
In general, paternalistic intervention is a measure to prevent incorrect distribution of goods, irregular prices, black markets, and others.. According to the articles, despite a slower rate of increase in LPG consumption compared to last year , a huge amount of 8000 crore is saved in six months. This proves the complete need for paternalistic intervention.
DBTS was launched by the government to ensure transfer of subsidies to the bank accounts of beneficiaries in a transparent manner. The other objectives are: • Accurate Targeting • De-duplication • Reduction of Fraud • Process Re-engineering of Schemes for simpler flow of information and funds. • Greater Accountability .By providing subsidy the purchasing power of consumers increase but it does not mean that this income will be used to buy only LPG cylinders. It may be used to purchase other goods which increases the level of satisfaction. This scheme affects different income groups differently. The rich would continue to keep their demand constant while the poor are likely to spend their subsidy on other essential goods. The poor will have to substitute LPG with other traditional sources. A paternalistic intervention is necessary because it helps the lower income groups to afford an essential good like LPG.
The Direct Benefit Transfer Scheme is clearly an advantageous scheme for the following reasons:
a. It is helping the government in saving valuable money, lost mainly due to the presence of middlemen and complications arising out of the previous scheme such as fake accounts.
b. It is beneficial for the OMCs as everyone is now buying cylinders at the market price and there is no question of ‘compensation of loss by the state subsequently’. Also, the sales of non-subsidised cylinders have increased substantially.
c. As the scheme does not necessitate the Aadhar use, it can be called more inclusive.
d. With the big and important companies thinking about investing in the rural areas, the rural people will get easier access and a more accountable redress system for their grievances.
e. The scheme necessitates the use of banks and thus is an incentive for people for maintaining a regular banking account.
The beneficiaries will spend the transferred amount on LPG. Due to the income effect brought about by the ‘direct transferring of money’ to the accounts of the beneficiaries, naturally, their expenditure on LPG will increase, even though by a very small margin as the fuel requirements will not increase beyond a certain point.
The rich and the poor will react differently. Some of the poor might not be aware of the scheme and fall prey to economic ignorance, thus ending up making no change to their consumption pattern. Some of them might not have access to the sum of money required to buy the cylinders at market price and might feel uncomfortable about it. Some of them might be consuming an amount too short to increase their consumption from the transferred money and therefore, use it all in buying other goods. The rich will tend to maximise the satisfaction they will get from the transferred amount and will spend only a part of it on buying fuel.
This paternalistic behaviour is necessary as there are numerous advantages arising out of it. The government, obviously, is being able to save a lot of money as pilferages are under check and ghost beneficiaries or fake accounts are eliminated. The sellers are benefiting in a way from getting the proper market price and not a merely abstract ‘compensation of losses’. The consumers will be happy to get an increase in their income to spend on various other goods. It also serves the purpose of economic inclusion, encouraging people to take up regular banking activities.
The direct transfer scheme was introduced to reduce inequity and allow poor people to get accession to certain essential goods by ensuring that the benefits go to individual bank accounts electronically without much suspension in payment, pilferage and duplication.
By having the transferred funds in an individual's account, an individual may aim on buying other goods to increase their level of satisfaction. For most people of the poorer section in the rural areas, the cost of LPG is high. As substitution is possible, they may substitute it with biogas. Thus, when they have their income increased, they may buy other goods which may not have easy substitutes and therefore increase their satisfaction level and move the indifference curve to a higher level. On the other hand, people belonging to the middle and upper class may not change anything in their purchase as the amount of transferred funds might not make much difference to them as to the poorer ones. But still, the consumption of LPG in the urban areas which consists of upper and middle class people is high.
It is necessary for paternalistic intervention as LPG is a non-renewable resource and also to make it available to all the classes of society.
Direct Benefit Transfer Scheme(DBTS) introduced by the government has its own beneficiary measures. This scheme introduced by the government has its greatest merit in terms of capturing fake and unidentified accounts which were using LPG connections and LPG cylinders in the black market. Also linking it to the Aadhar card system and bank accounts would help to bring transparency and remove the intermediary sources who use fake accounts and get these LPG cylinders sold in the black market. Thus corruption would be significantly reduced by this scheme.
Also the fact that money would be transferred to the bank accounts of the people in the form of fund transfer as a part of this scheme would provide them with an increased purchasing power,which would be utilized by the rich and the poor in different ways.While the rich would be probably not much affected by the subsidy,it would be more beneficiary for the poor who could spend the money on other commodities or alternatives and thus help in increasing their level of satisfaction.
There is definitely a need for paternalistic behavior in the consumption of LPG since it is a non renewable source of energy and therefore is present in limited quantity.Therefore to regulate its consumption by all the groups of people it is necessary for the government to intervene so that LPG can be made available to everyone equally.
1)Will the average beneficiary spend the transferred amount on LPG?
No, he will spend only a fraction of the transferred amount on LPG. The amount that he will spend on LPG will be determined by calculating what is the increase in the total income of the consumer . After we get the percentage increase in overall income , using the income elasticity of LPG we will calculate how much the consumer will spend on LPG.(NOTE: Consumer has to allocate income on other goods too.)
2)How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour?
The consumer will now spend less on LPG with DBT than he would have spent if he would have bought at subsidized rate. With the subsidized rate , the consumer would have been inclined to buy more of LPG and less of other goods(Since the apparent price of LPG seems lower). However with DBT , given that the consumer is free to spend money as he likes he will choose to allocate his income on other goods too and thus decrease spending on LPG.
3) Is it necessary for paternalistic intervention in consumption behaviour?
Yes it will help the poor in making better consumption decisions and making LPG available to them since LPG is such and indispensable part of a household’s requirement.
Direct Benefit Transfer Scheme is a government run flagship to promote social inclusion by ensuring that benefits of LPG subsidy are directly transferred to individual's bank accounts electronically thus reducing delay in payments, ensuring accurate targeting of the beneficiary and exterminating pilferage, corruption and duplication.
But the problem with the programme is that to avail the benefits, consumers will need to have a bank account/AADHAR to join the scheme and receive LPG subsidy and given the lack of infrastructure, connectivity and literacy in our country it will prove to be a major hardship to the lower strata of the society. Also though the scheme would help in curbing pilferation and ghost accounts, thus favoring our fiscal deficit to a great extent but it will also lead to exclusion of the poor who actually need the benefit of the scheme for they may not be able to buy LPG at the market price.
Microeconomic Analysis
The demand for LPG is relatively elastic which means increase in price will eventually lead to fall in its demand as the budget line of the consumer would rotate towards the left leading to consumer being satisfied at a lower level of consumption. Though by returning the income (through subsidy) to the consumer under the scheme the budget line will shift parallel towards right leading to an increase in demand but still it would be substantially low considering the original demand and hence the scheme would lead to an overall reduction in consumption.
As far as spending the transferred amount on LPG is concerned, It is highly unlikely that the average beneficiary under DBT will spend the transferred amount on LPG particularly in case of lower income groups, as they may resort to substitutes like kerosene, firewood etc. for they may not be able to afford LPG at market price and hence may use the subsidy for purchasing other items. But the scheme may not affect the demand for LPG among higher income groups, as thy still would be able to afford it. Thus the mechanism of buying at market price and receiving an income transfer affects individual consumption behavior differently to different income groups.
Such paternalistic intervention in consumption behavior is necessary to ensure equitable access to resources by making the expensive and necessary goods like LPG affordable and also since LPG is a scarce resource government through intervention manages to reduce its overall demand, hence encouraging conservation.
An ambitious project launched by the indian government, which seeks to address the malaise of corruption in welfare schemes, the DBTS, is fine idea at first sight. But like everything else that glitters, it may not be gold.
1) The scheme covers the poor, BPL families and the like, but let us look at the fundamental flaw in the system:
The scheme wil transfer to the beneficiary's account the money he had to spend over and above the subsidy he previously availed of whose advantage he will be robbed W.E.F. 15.05.2015, and a person who is enrolled has to first pay the net unsubsidised amount, a phenomenal jump from Rs.425, to Rs. 782. which most of the purported beneficiaries may find impossible to pay up. So the scheme may adversely affect the consumption habits of the beneficiaries.
2) As for the second question, those that managed to pay up the unsubsidised about to avail oneself of the DBTS, will, once having been compensated have in their access, some extra income that they could now spend, this they would obviously not spend on more gas, but on whatever grants them more satisfaction. Thus it is a granted fact that the expenditure will diversify, and the beneficiary may end up spending more on other goods than he used to during the subsidy days, i.e. he will tend to buy less gas, prices increase, elasticity will prompt him automatically to reduce consumption. Thus, you're effectively failing in providing him the same amount of gas.
3) Now that the basic aim of the scheme seems to have vitiated the government must begin mulling options o trying to restore the previous level of gas consumption, if it lies within the practical limits.
Paternalism comes with a cost, the cost of forcing the people to use less gas even though they can afford not to.
Under the original policy for subsidizing liquefied petroleum gas (LPG), customers bought subsidised gas cylinders from retailers, and the government compensated companies for their losses. Under the direct benefit transfer for liquefied petroleum gas (DBTL) customers have to buy at the full price, and the subsidy would be directly credited to their bank accounts.
Buying the LPG at market price leads to decline in overall consumption.As a result new budget line would rotate towards left of the original budget line.The consumer is not likely to spend the transferred amount of subsidy on LPG as its income elasticity is low and people are not likely to change their consumption level to a higher extent. Also income effect of the subsidy transfer would be dominated by the substitution effect caused due to buying at market price.
The scheme would effect the consumption behaviour of individuals differently. For well to do urban and sub urban households there will not a very significant change in the consumption pattern but the poorer sections of the society might show a significant decrease in consumption on increase in market price as the higher substitution effect will make them worse off .The overall consumption level won't change significantly.
Paternalistic intervention is required as it ensures equitable distribution of resources.The Direct Benefit Transfer scheme aims to ensure a transparent and accurate transfer to beneficiaries and also elimination of duplicate beneficiaries. Greater challenges are to extend these benefits to poor and rural areas as reports show that urban and sub urban populations are currently consuming more than half of LPG available.
I believe even though it might be plugging loopholes at the execution stage, consumption overall might fall. Because after the introduction of Direct Benefit Transfer Scheme in context of LPG subsidy the consumer now is being expected to path upfront total price without any subsidy. Which would be making a bigger hole in his/her disposable income although, it will be reimbursed later. It would still leave consumer worse off since, he/she has to procure it at full price before hand.Also it might be possible that consumer change their preferences on long term, the one which will be cheaper and without any clumsy mechanism.
DBTS was introduced to reduce delay in payment, ensure accurate targeting of beneficiary and curbing pilferage and duplication. However, this mechanism involves transaction via bank accounts, which are eventually not accessible and manageable by every section of society. The weaker sections will be still subjected to corruption, duplication and black marketing. And moreover, the will prefer to rely on other fuels.
The fact of paternalistic intervention can't be claimed 'necessary' in consumption behavior. Because on the one hand, it is helping government to save huge amount of money and preserve natural resources (LPG being a non-renewable resource). Also it encourages other schemes such as Pradhan Mantri Jan Dhan Yojna, increasing awareness among citizens. But on the other hand, it is ignoring the very fact of backwardness of lower income group making them slightly worse off.
The Direct Benefit Transfer scheme was launched in order to ensure that there were no leakages and delays, and that the subsidies and benefits reached the people they were meant for. Using the Aadhar system, funds will be transferred directly to the people
The consumption behavior varies and two situations might arise. Due to the fact that the market price is higher than the subsidized one, the consumer will have to spend more of the transferred amount to consume the same amount of LPG. On the other hand, a lower income consumer, because of the increase in income and therefore the purchasing power, might prefer to buy other desired goods, thereby shifting his market basket, and thus consumption of LPG will be comparatively lower. This the indifference curves will be lower than the one without subsidies, indicating lower satisfaction for the consumer.
I believe paternalistic intervention is necessary, because without this sort of a system, a man with a lower income would be unable to afford desired products such as LPG. The DBTS is also an improvement on the subsidies system, as it increases the purchasing power of the consumer , and gives the consumer a choice of what to spend on.
Direct Benefit Transfer (DBT) Scheme's aim is to transfer subsides and other welfare benefits directly to the bank accounts of beneficiaries. The bank accounts of the beneficiaries are linked to their Aadhar cards. This scheme eliminates intermediaries and rents for fair price shops as subsidies and benefits of welfare schemes are transferred directly. This will help Indian economy in the long run as the structural expenditure will be reduced. But still there are many rural & tribal areas, which don't have banking facility and road connectivity.
All Aadhaar-linked domestic LPG consumers will get an advance in their bank account as soon as they book the first subsidized cylinder before delivery. On receiving the first subsidized cylinder subsidy for next will again get credited in their bank account, which can then be available for the purchase of the next cylinder at market rate until the cap of 12 cylinders per year is reached. So, the direct cash may not be used for intended purpose of buying LPG and can be used in unhealthy ways. Therefore, less amount will be spent on LPG by the average beneficiary.
Since, LPG is an exhaustible resource therefore paternalistic intervention is necessary to regulate consumption for sustainable development.
The Direct Benefits Transfers Scheme, or as it is more popularly known, the DBTS, was a policy instrument introduced by the erstwhile UPA government to cut out the middlemen which plagued the subsidy distribution system of the country and to ensure that the central and state government sponsored subsidies are credited directly into the accounts of the intended beneficiaries. The system has gone a long way in the efforts to bring stability to the country's economy by plugging all the gaps in the already bleeding exchequer. Even with all the benefits that DBTS brings, I believe there can be no debate that still much needs to be done.
ECONOMIC ANALYSIS OF DIRECT BENEFITS TRANSFER SCHEME WITH REGARD TO LIQUEFIED PETROLEUM GAS (LPG) SUBSIDY-
For the purposes of my analysis I have made the following assumptions-
1. The person is a question is an urban middle class man.
2. Annual income of my subject is 6,00,000 INR.
3. Price of LPG prior to taxation is 600 INR per unit.
4. Tax per unit LPG cylinder is 300 INR per unit.
5. My subject consumes 12 cylinders of LPG in a year.
Once we draw the budget line and the indifference curve tangential to the budget line drawn, the situation gets a tad clearer. We now know that prior to the tax being introduced, the subject spends 7200 INR per annum on LPG cylinders. Once the government introduces the tax on LPG cylinders, the price per unit shoots up to 900 rupees. Drawing from the data provided above, if the price elasticity of demand is -1.01, and if the price has shot up by 50%, then it follows that the quantity demanded by my subject will decline by 50.5%. Thus his consumption reduces to 4.95 LPG cylinders from 10 LPG cylinders. Now, we know that the tax income accruing to the government per cylinder sold is 300 rupees. Hence, the government effectively taxes my subject for 1,485 rupees. Since the major purpose of this tax is to discourage people from wasting precious resources or resources which are expensive or difficult to procure in the international market, the government kicks back the tax so collected in the form of subsidy. This subsidy, which is worth 1,485 rupees with regard to my subject, acts as his additional income. Thus the price line shifts outward. The subsidy is 0.2475% of my subject's annual income. Now, knowing that the income elasticity of demand for a middle class urban man is 0.658, it can be concluded that the quantity demanded by my subject will go up to 6(approx).it is thus apparent that the LPG subsidy program has achieved the goal it set out to achieve. LPG consumption has in fact gone down, but so has the consumer's level of satisfaction. Now to answer the questions posed to us in the original post-
Q.1. Will the average beneficiary spend the transferred amount on LPG?
A.1. As my analysis has already shown, by virtue of income elasticity of demand, the consumer will spend a part of his income on LPG cylinders, increasing consumption from 4.95(5) to 5.94(6) units.
Q.2. How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour?
A.2. The consumer will buy a unit more of the LPG cylinders, but still his consumption will be less than what it was during pre-taxation levels. The same goes for satisfaction.
Q.3. Is it necessary for paternalistic intervention in consumption behaviour?
A.3. Such paternalistic interventions by the government are not entirely necessary because whatever goals they set out to achieve can be achieved in a manner which is more efficient from an economic perspective. On the other hand, it cannot be denied that these interventions have some effect and thus at times become a sort of necessary evil for governments they must resort to in desperate times.
1. The average beneficiary will not spend the entire amount on LPG, unlike the older scheme; he is not being forced to spend the rebate on LPG. He’ll select a basket which would maximize his utility, so he’ll spend some of the money on other goods and the rest on LPG.
2. Let’s take an example to understand this. Assuming that the individual’s income is 10,000 rupees, price of other goods is 1000 and that the price of a cylinder is 417 (subsidized). Let’s take the market basket of the individual at 12 cylinders of LPG which means that he’ll buy 5 of other goods and 12 cylinders. Now, the price rises to 626.5(market price). As there is a 50% rise in market price, and the price elasticity of demand is 1, the demand will fall by 50%. So, the new market basket will be 6 cylinders and 6.24 of other goods. However, the person will get the rebate back, which will be 1257 rupees. Now, this money will not be spent wholly on LPG. The income elasticity of demand is 0.7, which means that for every 1% rise in income there is a 0.7% increase in demand. The rise in income is 12.57%, which means that the rise in demand is 8.8%. So, now the market basket chosen will be 6.528 cylinders and 7.16 of other goods. This shows that there will be a fall in the consumption of LPG and the consumer will prefer a market basket that has LPG and more of other goods. However, this percentage increase in income is noticeable only when the income is low. For the relatively better off people, there will not be a great reduction in consumption even when they buy it at market price.
3. Such a paternalistic intervention in consumption behavior is necessary as it is more beneficial to the poor people and the money that they would have spent on LPG can be used by them to provide for other amenities of life. It doesn’t have a great impact on the consumption of LPG by the richer people, but even there is a slight decrease in consumption. Moreover, it reduces the consumption of LPG which is beneficial in the long run.
Analysis of DBTS- Aishwarya Jain
The DBTS scheme requires the beneficiary to have a bank account and considering that the target group of this scheme is the lower strata of the society and that majority of the people in the said target group still do not have bank accounts, this scheme faces a major road block.
Apart from this the market analysis is as follows:-
1.Taking into account the use to which lpg is put it is highly unlikely that the transferred money will be re-invested in the LPG. This is because a change in consumption of LPG will mean a change in consumption habits i.e. an increase in demand for food, which is unlikely to happen.but with an increase in the purchasing power due to an increase in the income the consumer is more likely to change its market basket and diverge the income to other products which will give him more satisfaction.
2. In the short run consumer won't change his behaviour because needs and preferences don't change overnight. But in the long run the consumer will change his market basket also there will be an outward shift in the budget line due to an increase in purchasing power and hence the consumption behaviour will be positive and demand for other goods will increase.
3.The paternalistic intervention is desirable to stop black marketing and reduce the number of intermediaries . This would eventually be helpful for the poor and middle class.
With the Direct Benefit Transfer Scheme, the government aims to eliminate bogus LPG connections and thereby reduce the losses caused to it. Moreover, the intervention by middlemen will also be done away with. The economic implications of this scheme are as follows:
The amount given as subsidy by the govt. would cause the budget line to shift outwards. The question now arises if the consumer will spend this additional income on LPG or not. The rich and the poor will be affected in different ways. For the poor, it might be a burden to pay the entire market price of LPG initially. This may lead to slightly lower consumption. However, eventually, after receiving the amount, the overall consumption may not change. Consumers may not necessarily spend the entire amount on LPG, they may choose to consume some other goods as well which would maximize the satisfaction. However, the rich would not be affected much. There will not be any significant difference in their consumption of LPG, despite the initial payment of the entire Market Price. The increased income will be spent on other goods as well so as to maximize satisfaction.
Paternalistic intervention is necessary to regulate consumer behaviour. The poor, who are often ignorant about how to derive maximum satisfaction from consumption, are hugely benefited by such interventions, which aims at improving general welfare of the people.
The Use of DBTS for LPG subsisdy is an effective way to ensure that the customer receives his subsidy without much delay.
1. When the consumer intitally purchases a cylinder under subsidy, he has to pay the market value for the cylinder. It is only later that the subsidy is transferred to him. In the short run, though there may be an increase in purchasing power, the consumer may not spend the subsidy on more LPG but may buy other products.
2. While market demand for LPG subsidised cylinders may increase as more and more people make avail of this option, the Individual consumption may increase initially. However, the demand for LPG being inelastic in nature and fixed at a maximum of 12 cylinders per year, the consumers may not take advantage of the tranfer by buying more LPG. In the long run however, the individual consumption may increase as consumers have a considerable subsidy collected.
3. Paternalistic Intervention is to regulate demand and ensure fair distribution in goods to all sections of society. While the rich may still be at a lower level or same level of satisfaction, since they have sufficient income but limited no of cylinders they can buy, the poor may be at an advantage, because they are able to buy the same LPG at a lower price. Paternalistic intervention may be necssary in situations of acute shortage in supply of goods and very high prices of essential commodities. However, it may continue to put certain parts of the population, which are not affected or influenced by such subsidy at a status quo.
-Mrinali Komandur
No, the intended beneficiary of the DBTS will not spend the entire rebate on LPG, as there has been no increase in demand for LPG. In the old scheme, the government made the decision for the consumer to spend the subsidy on LPG. However, in the new scheme, the power of choice is with the consumer and he is free to choose the market basket that best suits his needs with the extra income in the form of a rebate.
The effect on individual consumer behaviour will be such that there will be a diversification in the market basket consumed. While in the old scheme LPG was bought at a cheaper rate courtesy of the government, it is evident that although the consumer has had no change in income, due to the prime facie increase in price, (s)he will be forced to consume less LPG than before, since the extra income received is not mandatory to be spent on LPG. As mentioned above, with diversification of the market basket, consumption of goods other than LPG will increase. Thus, consumption of LPG is lowered as is evident from the low income elasticity of demand mentioned above.
Although ‘paternalistic intervention’ by the government seems to have the best of intentions in mind, in reality it is resulting in lower consumption of LPG. The government should consider policy changes which will achieve the desired effects of lowered costs and cut down on illegal LPG consumption without forcing the average Joe to reduce his consumption of LPG, especially when he has the requisite income to buy it.
The Direct Benefit Transfer Scheme for LPG, later renamed as PAHAL, has been linked with the Aadhaar Card to reduce diversion and eliminate bogus LPG connections.
The average beneficiary will not spend the entire compensated amount on LPG but will direct a part of the amount on expenditure of other goods as well. The amount that he will spend on LPG will be determined by taking into account his increased income and the income elasticity of LPG. The amount spent on LPG at market price with the amount being directly transferred to his bank account will be less than the amount he would have spent, if he had bought the LPG at subsidized rate. The consumer who spent more on LPG when he bought it at subsidized rate will spend less when he buys the LPG at market rate as he would like to spend the transferred amount on other goods as well.
A paternalistic behaviour pattern is needed in the consumption of a non-renewable limited source of energy like LPG to ensure its availability to all groups of people.
The DBT scheme will help prevent delay in payment,pilferage and duplication. Also, it is likely to reduce the sale of unauthorised LPG cylinders at higher rates, reduce administrative costs and at the same time provide financial inclusion in rural areas(due to the requirement of a bank account for transferring the subsidy). It also increases government's savings on elimination of fake accounts.
The increase in consumer's income is likely to be used for buying goods other than LPG as generally instead of buying a single good, consumers prefer to buy a bundle of goods by spending the same amount. However, this will also depend on the consumer's income and the income elasticity of LPG, as the ones with high incomes are less likely to be affected by this scheme as compared to the ones with low incomes (Hence the " #giveitup " slogan).
As far as paternalistic intervention is concerned, I think it is necessary keeping in mind the income disparities in India. It is done with the intention that the person interfered with will be better off. The government needs to increase the success rate of this scheme in rural areas as the urban and semi-urban areas of the country have become saturated and now, have no scope for growth (as written in the article posted on 'livemint').
The Direct Benefit Transfer Scheme is initiated by the government in an attempt to modify the instrument of relocating subsidy. This scheme is greatly welcomed as it ensures transparency and ceases malpractices in the market such as flinching of funds. This scheme is beneficial to the people living below the poverty line as it transfers the subsidy amount directly to their bank accounts.
An average beneficiary of this scheme might not spend his entire amount of subsidy on LPG as a rational consumer might spend this amount on other goods that might provide him a satisfaction greater than what he receives from LPG.
The mechanism of buying at market price and receiving an income transfer will affect individual consumption behavior as a consumer who belongs to lower income group would shift to conventional methods rather than spending his income on LPG as the income elasticity of demand of LPG is low. On the other hand a consumer belonging to above the poverty line income group would not shift his preference from LPG in the short run.
Paternalistic intervention is obligatory since the subsidy amount that is received by the beneficiary can be utilized by him/her to consume other goods.
The Direct Benefit Transfer Scheme is surely a benefeciary scheme introduced by the government. It surely intends to ensure accurate beneficiary and unwanted delay in payment.
But looking into the issue of LPG subsidy, the DBT does not necessarily want to target the poor sections the society or intends to reduce any kind of inequity. The Ministry of Petroleum and Natural gas clearly states in the scheme that, any person who has a bank account and an Aadhar card can avail the LPG subsidy scheme.The scheme is open to everyone and not subjected to a certain section of the society. It does not intend to uplift or provide basic requirements to the poor sections of the society.
The main goal of the the DBT is to avoid pilferage and duplication. I think that the process of transfering the money to the beneficiary's bank account could not be implemented at a large scale because of the fact that in a country like India where a quarter of the population cannot even earn 50 rupees a day, one cannot expect everyone to have a bank account to benefit from this scheme. If the DBT really wanted to target the poorer sections of the society, it would fail to be a bigger success.Because today it is only the middle class and the richer sections of the society that are benefiting from this scheme - the one's who have a bank account and an aadhar card.
The fact that the money is being transferred to the consumers bank account after deduction of the subsidized rate, the income of the consumer is increasing. By the income method,with increase in income, the consumer may choose to spend the transferred amount on LPG. But, he may also choose to spend the amount on other requirements based on tastes and preferences. So, the expenditure pattern cannot be necessarily determined.
The Behavior towards receiving an incoming transfer differs depending on the economic class of the society. The richer sections of the society might not find a a significant change in their income after the transfer, so they might not change their consumption pattern. The poorer sections of the society might save the money for future expenditure or allocate the resources in buying other essential goods for their requirement.
Paternalistic intervention is a an immediate requirement with respect to the poorer sections of the society. It helps them make correct choices with respect to purchase of goods at a subsidized rate. It also helps in making them aware of the schemes that can directly influence their consumption pattern
Assumptions-
1)The income elasticity of an average consumer is 0.7
2)The price elasticity of an average consumer is -1.
Since the consumer would have to buy the LPG cylinders at the market price, their will certainly be a decrease in its consumption. Since the price elasticity is taken to be -1, there will be an equal percentage decrease in the consumption by which the price has risen.Therefore, the consumer will shift towards a lower indifference curve. When the subsidy is directly transferred to their bank accounts, there will be an increase in the consumption of LPG but it will not reach the previous levels as the whole income wouldnt be spent by the consumer only on LPG since income elasticity is assumed to be 0.7. A part of his rise in income will be spent on other goods too.
The consumer will be on a lower indifference curve than he used to be when he didnt buy LPG at the market price and thus there is a fall in the level of his satisfaction. Inspite of this, it is a good measure taken by the government in the light of the fact that there is an enormous amount of savings thereby reducing the burden on the national treasury. These savings can be used for other productive purposes by the government. Thus, it can be validly concluded that the consumer is the ultimate winner after the implementation of this policy.
DBT scheme launched by indian govt. aims to plug leakages in the previous subsidy regime. To prevent pilferage and reduce various administrative costs involved in the process, subsidy will be transferred directly to individual's bank accounts which are linked with Aadhar cards.
By transferring subsidy directly to a consumer's account, govt. is increasing purchasing power of consumers, but all the consumers will not spend whole amount on LPG. Only rich ones will be spending it on LPG. The poor will spend a part of it to other goods, in order to maximize their satisfaction.
This scheme will not affect the consumption behavior of rich, but it may change the consumption behavior of middle class and poor ones. Those living in rural areas might shift to other resources of energy like firewood, biogas etc. and those in urban and semi-urban areas might reduce the consumption of LPG.
Further role of paternalistic intervention can not be ignored in economically diverse Indian society. It is needed to make LPG accessible to poor as well as to control the consumption of a non-renewable and limited resource of energy.
Whether the Direct Benefit Transfer Scheme will increase or decrease the satisfaction of the LPG user will depend upon his or her preferences.If the money is transferred directly into the account, there are two possible ways as how will the consumer use it.So, say if the consumer belongs to a well off family he has the capacity to buy the cylinder even if there is no subsidy provide so if he gets the money in his account there will be a rightward shift in his budget line.On the other hand if a poor gets the money in his account he will try to enjoy other goods and will not use all the subsidy amount only on buying the cylinder.So, it all depends on the preferences of the consumer whether he benefits or not from the Direct Benefit Transfer Scheme.
Due to the implementation of the Direct Benefit Transfer Scheme the market price of the LPG cylinder will increase. The consumer can now afford to buy less. The budget line will rotate leftward. After the consumer receives the transferred amount his budget line will shift outwards parallel to the rotated budget line due to the income effect.
A part of the transferred amount will be utilized for LPG consumption while the rest will be used on other goods by an average beneficiary in accordance with the satisfaction derived by him from different products
The effect of this on an average consumer will be in the form of reduction in LPG consumption and lower satisfaction. Due to substitution effect he will buy more of other goods.
Paternalistic intervention is necessary to help the lower income sections of the society get access to LPG. This helps in equitable distribution of resources.
The intercept of the budget line of the consumer is initially Income/initial subsidised price. When the consumer has to pay the market price (due to direct cash transfer of subsidy), the budget line rotates to the left showing a decrease in the number of LPG cylinders that can be bought. On adding the rebate offered to the income, the budget line shifts outwards parallel to the new budget line. This is because it increases the ability to buy LPG as well as other goods.
The average beneficiary will spend the income not just on LPG but on other goods as well due to the substitution effect.
Individual consumption will go down compared to the initial consumption.
Paternalistic intervention may solve the problem of leakage of money due to fictitious accounts etc but does not result in an increase in consumer satisfaction as the consumer shifts to a lower indifference curve.
The direct benefit transfer scheme is basically targeted at the lower income group or people below the poverty line, however like all other government schemes a major chunk of the actual benefit reaches the “haves” instead of the “have-nots.” Thus whether an average beneficiary spends his transferred amount on LPG depends on the fact that to which income group a consumer belongs to.For an average consumer belonging to a middle income group the income effect will be positive assuming LPG for him is a normal good thus he will spend the subsidy on LPG. But as for an average consumer below the poverty line he would prefer to spend the amount transferred on goods other than LPG as they may provide him with more satisfaction, considering it does not form a part of his necessary consumption.
As per the question regarding whether it necessary for paternalistic intervention in consumption behaviour, the answer is yes. For if the government does not intervene the market for the benefits of the lower income groups the income inequality between the lower and the upper income groups will not reduce.
1.Will the average beneficiary spend the transferred amount on LPG? no,it is highly unlikely that the consumer would the transferred amount on LPG because in keeping with other such schemes where subsidy is provided by the govt the DBTS scheme is also aimed at the below middle class section of the country and if a person from a low income group moves from a non-LPG fuel to LPG9the subsidy would enable many of those who were earlier unable to afford LPG afford it now) the MRS of more LPG(more than what is needed at present) for other neccesary goods( which give the consumer more satisfaction than more LPG) will further decrease and therefore he is more likely to spend the transferred amount on such goods.
2.How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour? The DBTS will affect the consumer according to the income level they belong to .Even though the rich are unlikely to change there consumption habits ,the modified version of DBTS(where the consumers has to pay the full market price at the time of transaction and subsidy is transferred to there accounts after some time instead of the earlier scheme where the subsidized amount had to be paid at the time of transacation)will have adverse affect on the poor section of the society because many of those who were earlier able to arrange the cost which they need to pay at the time of transaction (market price-subsidy) will not be able to arrange the full amount that they need at the time of transaction(market price) as required under the new scheme and are more likely to shift to other domestic fuel which are available at a cheaper price(eg.kerosene)
3.Is it necessary for paternalistic intervention in consumption behaviour?Yes it is very much necessary to have such interventions like DBTS in an economy like India where a majority of the citizens are unable to purchase many such goods which are necessary for a comfortable life.DBTS not only reduces the amount which the consumers have to pay but is also instrumental in improving the country's economy because as the price of the good decrease the demand is likely to increase and hence the producers will increase the supply.
Analysis of Direct Benefit Transfer Scheme – Anubhuti Rabha (2208)
The ambitious Direct Benefit Transfer Scheme is aimed for the people who fall in the lower income bracket by ensuring that the subsidy money reaches them speedily by minimising the tiers involved. An average beneficiary can be who gains only a certain percentage of profit in the DBT Scheme and since as given in the article, 65% of the Indian population already consumes LPG we can safely assume that the average beneficiary too already uses LPG even before the subsidy. LPG is a necessary good therefore in the short run the consumer will not cut down his consumption and therefore despite an increase in price from the earlier subsidized rate to the market price the demand for LPG will not fall down by much. Thus, its demand will remain inelastic. The amount that he will spend on LPG will be determined by calculating what is the increase in the total income of the consumer. After we get the percentage increase in overall income, using the income elasticity of LPG we will calculate how much the consumer will spend on LPG. Due to the fact that the market price is higher than the subsidized one, the consumer will have to spend more of the transferred amount to consume the same amount of LPG. He may change his market basket and use a part of the money to purchase another good which gives him greater satisfaction, i.e., a market basket lying on a greater indifference curve. Although, the change in market basket may not be very drastic in the case of a person with greater income as he has enough funds to meet his basic needs whereas in the case of a man of lower income, the probability that the funds received may be diverted to another good of greater value is more. I believe that there should be paternalistic intervention as in its absence, the lower income people will not be able to afford goods like LPG without subsidy. The Direct Benefit Transfer Scheme not only ushers in efficiency and transparency, but also gives the consumer a choice of what to spend on along with increasing the purchasing power of the consumer.
1. It depends on the income elasticity of the consumer, whether he would spend the whole transferred amount on LPG or not. More the income elasticity, more would be the consumption of LPG and vice versa, a part of the money transferred to him may be used in buying another commodity which may give him more satisfaction than the unit of LPG.
2. Under the DBT, when a consumer will join in, he will be credited some amount of money to his account in advance which would subsidize the LPG for him, so the demand would neither increase nor decrease as compared to the situation with no DBT scheme.
3. Paternalistic intervention encourages conservation, saves government money from elimination of duplicate connections.
According to Central Government aim of Direct Benefit Transfer Income is to reduce wastage, eliminate siphoning of benefits through ghost/duplicate beneficiaries and better target the benefit programme by bringing in identity challenged poor within the fold of benefit programme.
DBT includes transfer of benefits "directly" in to the customers bank account.Under this scheme for LPG customer has to buy a cylinder at full price , and the subsidy would be transfer to his account directl y,by linking with UIDAI Adhar number.
In toto ,DBT does not contains any new bumper scheme or welfare spending. Its just aim at revise the distribution of the existing welfare spending through technology-enabled means so as to reduce waste and better target it by removing ghost/ duplicate beneficiaries.
it can not remove or resolve all the benefit leakage.The process however, can harness large economic and social transformation by inter alia boosting consumption and leverage at the bottom of India’s population pyramid.
Yet , the basic point is of giving cash/benefits directly to the customer bank account through technologically superior, cheaper and more efficient distribution channels can hardly be questioned.
The DBTL scheme has been launched by the government to improve the existing scheme. The main problems with the existing scheme were:
1. Delay in payment of subsidy
2. Inaccurate targeting of the beneficiaries
3. Pilferage, corruption in middlemen, etc.
Under the new scheme, the LPG subsidy has reduced the price per cylinder of LPG from INR 626.5 0 to INR 417.00. The subsidy amount (INR 209.50) will be directly credited to the consumer's account. This is to ensure that there is no corruption.
To know whether this scheme benefits the consumer's it is targeted at, the following study has been conducted.
Assumptions:
1. The consumer is a lower class man, having an income of INR 20,000 per month.
2. The market price of a cylinder of LPG is INR 626.50
3. The subsidized price is INR 417.00
4. The consumer prefers more of each good, ie a higher quantity means more satisfaction.
5. The market basket consists of LPG cylinders and other goods taken together.
6. The unit cost of other consumables is INR 1,000.
7. The consumer consumes 7 cylinders of LPG a year.
These assumptions have been made for the sake of easy analysis of the data, and are partially based on the statistics available in the following articles:
Livemint
Plotting this data on a graph gives the following result:
Graph
Here we can see that the original budget line is AB. This represents the budget line before subsidy amount is transferred. After the subsidy amount is received the budget line rotates to AD.
On the original budget line, Utility is maximised at point M1, which represents 7 cylinders of LPG consumed, and 15 units of other goods consumed.
On the new budget line, Utility is maximised at point M2, which represents 7 cylinders of LPG and 17 units of other goods.
Thus, it is observed that the subsidy has allowed the consumer to use more of his income on other goods, leading to a higher utility curve. The additional income is not spent on LPG cylinders because the market price has not decreased.
Therefore, we can say that paternalistic intervention alters consumption behaviour, but in general increases utility. It acts as a welfare measure for the masses.
Joshua Nazareth (2233)
Ques. 1 Will the average beneficiary spend the transferred amount on LPG?
Answer 1. No, he won’t spend the whole transferred amount on LPG. It depends on the income elasticity of the customer. More the income elasticity, more the consumption of LPG or he may use a part of it to buy another good which may give him more satisfaction than another unit of LPG cylinder.
Q.2. How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behavior?
A.2. For example,
Assumptions-
Income- Rs. 10,000
Price of other goods- Rs. 2000
Price of cylinder - Rs. 626.5-209.5= 417
Total number of subsidised cylinders are 12. So, if we take market basket as 12 then, the customer will buy 12 cylinders and
2.5 of other goods.
Afer DTBS
New price= 626.5
Rise in price= 50%
Price elasticity of demand (as given)= -1
Demand will fall by 50%.
New basket= 6 cylinders and 3.24 of other goods.
Rebate= 1257
Income elasticity of demand is 0.657
rise in income is 12.57%, which means that the rise in demand is 8.48%. So, now the market basket chosen will be 6.5088 cylinders and 3.64 of other goods. This shows that there will be a fall in the consumption of LPG and the consumer will prefer a market basket that has LPG and more of other goods.
Ques. 2. Is it necessary for paternalistic intervention in consumption behaviour?
Answer 2. It is not “necessary” for paternalistic intervention in consumption behavior but it is advisable to do that because of the following reasons:
1. It saves a lot of government’s money.
2. Reduces dependence on imports.
3. Reduces the consumption of non-renewable resources.
According to the data, since the consumer will not spend his entire compensated amount on LPG but on other goods as well. But the consumer's amount spent will depend upon price elasticity and the variation in income. The average beneficiary's amount spent on LPG at the given market price with the amount being directly transferred to the bank account has to be less than the amount the beneficiary would have spent if the LPG was bought from a subsidised rate.
Yes, paternalistic intervention is imperative for helping people with lower income level to get a good which is scarce.
1)Will the average beneficiary spend the transferred amount on LPG?
It depends on the income level and other factors like size of the family, that whether the beneficiary would spend the amount on LPG,because a middle and higher income family have more demand of LPG and they may demand more than the 12 subsidised cylinders in a year and in that case they would spend more than the amount transferred, while the no. of members in a household also determines demand for LPG.While family with more no. of members say 7-8 would require more than 12 cylinders a year, thus they would spend entire amount. Conversely, in the case of lower income family and household with less no. of members will have less demand for LPG and may not spend the entire amount on LPG.
2)Buying at market price and receiving income transfer would mean that the consumer is 'paying more' for LPG than before also he is getting additional 'income by way of transfers.Therefore, the consumer's budget line would shift inward while with impact of proportionate increase in income, the line would get parallel to the original line but would lie below the original line, thus the amount of consumption of LPG would reduce but at the same time making the use of additional income, he will spend more on goods othe than LPG hence, his market basket would get diversified but the satisfaction level would be less as new IC would lie below the original IC.
3)Yes, paternalistic intervention is necessary because it promotes equity through instruments such as subsidies, also capping the no. of subsidised cylinders helps in reducing the consumption of this scarce resource.Thus helping in reducing its wastage,.Also, it helps lower income groups in having access to the resource, and also it may become a souce of income for them as they are not likely to spend the entire one time transfer and thus diversifying their market basket.
The Direct Benefit Transfer Scheme for LPG, introduced by the Central Government, helps reduce the financial leakages in our system by linking the bank accounts of the beneficiaries so that they may receive subsidies 'directly' without any intervention of the intermediaries.
The primary goal of the LPG subsidy scheme is the elimination of fictitious accounts. The scheme is meant to target persons from the lower strata of the society.
1.An average beneficiary will spend a part of his increased income on the consumption of LPG cylinders. His expenditure on LPG cylinders will increase because of the transfer of money.
2.The amount spend by the consumer (after subsidy) will be less as compared to the amount spent by him had he bought at the market price. The consumer's purchasing power increases (after getting rebate) and he is now free to increase his consumption of the LPG cylinders or to allocate his income on other goods.
3.The paternalistic behaviour is of much importance as it enables the government to regulate the behaviour of the consumers and check financial leakages in the economy.
The aim of DBTS is to provide a more equitable distribution of LPG across various income groups of the country. If LPG is bought at market price rather than on subsidised rate, the consumer will have to part with more money to buy same amount of LPG.As the price of LPG has changed for the consumer and his income remains fixed, the budget line rotates around a pivot inwaards.This will reduce petrol consumption as income elasticity for LPG is relatively low and due to domination of substitution effect, LPG consumption is likely to be reduced.
No, an average beneficiary is unlikely to spend all the amount on LPG. By fund transfer, a consumer may choose another market basket,ths spending a part of this money to buy things other than LPG.
This method will discourage lower income people from buying LPG at market rates as LPG at that price might be out of their reach. This is likely not to affect higher income people as LPG at market price will still be bought as before by people with sufficient funds at hand.
This kind of paternalistic intervention is necessary as this will reduce misuse of it.Thus, gradually more of it will be available for use of people with lower income.
The DBT is a scheme that transfers subsidies directly to the people through their bank accounts. the crediting of subsidies into their bank accounts will reduce leakages and delays.
1.Due to DBTS there is a slight increase in the consumers income. The consumer might not completely use the amount on LPG might be a part of it and the other part on other goods so as to attain maximum satisfaction.
2.DBTS may affect each income group differently this may not affect the high income group and their demand for the product would remain the same whereas the middle and the lower income group might decrease their consumption due to the fact that their income has seen a substantial increase and they might prefer some other good over LPG
3.Paternalistic invention is necessary because it overall benefits the majority of the society and helps in preserving fuel for future consumption
Hrishika Jain
The assumptions that I make in my analyses are -
1. That the consumer's income is 10000 INR
2. Market Price of LPG Cylinder is 500 INR and subsidised price is 400 INR.
3. According to his preferences and the above budget constraint subject to the subsidised prices, he maximised his satisfaction on purchasing 10 cylinders and spent 6000 INR on other goods
4. Consumer belongs to rural LIG cateogory. (price elasticity - 1 , income elasticity - 0.657)
On increase in price (that is initial removal of subsidy) - he starts consuming 7.5 cylinders. (price elasticity being unitary). And on transfer of direct benefit of 750 rs., his income elasticity is 2/3 - and his consumption of LPG increases marginally by around 5%.
Question 1 - In my analysis, the consumer, on getting the transfer, spends a small portion of his increased income on LPG and the rest is used for other goods. This may be because of the small elasticity of income of LPG. For the relatively richer section, the income elasticity of demand of LPG may be even less and the increase in consumption of LPG may be marginal.
Question 2 - The overall effect of direct benefit transfer scheme is that it considerably reduces the consumption of LPG cylinders in the economy (this is true for all categories) . This is because the price elasticity of demand is greater than the income elasticity of demand. so the initial increase in price (ie removal of subsidy) - reduces the quantity demanded by 25% from the base of 10 cylinders. However, the increase in income is just 7.5 % which increases quantity by around just 5%, with a base of 7.5 cylinders. Thus, the absolute increase is considerably less than the initial absolute decrease. This is true for all consumers across income groups and area. it brings down the overall level of satisfaction of the consumers.
Question 3 - DBT scheme has several benefits in the form of reduced leakages, reduction of corruption, bureaucratic efficiency, cost effectiveness. However, this paternalistic decreases the satisfaction level of consumers. This is beneficial for the long term ulitity for consumers because of reduction in imports and reduction in depletion of fossil fuels.
The other way to intervene in consumer behavior by subsidies is to compensate the LPG companies for their losses. If the purpose is to decrease the overall consumption of LPG, then prices can be increased. However, this is not advisable as it will hit the poor section the hardest which will force them to shift to riskier substitutes like kerosene - which are environmentally unsound and also pose greater risk to health.
Anant KHanna (ID 2205)
Direct Benefit Transfer
The average beneficiary might not spend the saved amount on LPG since instead of the earlier scenario where there was a saving on the price of LPG cylinder, in this case there will be a Cash-back sort of an offer which will give the beneficiaries cash-in-hand thus leading to an apparent increase in the income of the consumer. As noted by the survey, the income elasticity of both rural and urban consumers of all three stratus have and income elasticity of less than 1, so the entire saved amount will not be spent on LPG and it will rather be spent on goods that give the consumer more satisfaction than LPG.
The individual consumption will not have a blanket change throughout all stratus and societies since the price elasticises are not commonly above or below 1. In the rural lower strata where the price elasticity of demand is 1, the demand for LPG cylinders will decrease in an equiproportionate manner with the rise in price. However in the rural middle and high and urban high strata the demand for LPG cylinders will decrease in a manner that is less than proportionate as compared to the rise in price of the cylinders though it must be noted that the change in demand will be very close to and equiproportionate fall in demand. Finally, in the lower and middle urban stratus the change in demand with the increase in price will be more than proportionate leading to a greater fall in demand as compared to the rise in price.
The paternalistic intervention is essential as it creates an (albeit artificial) increase in the income of the consumer thus giving him more choice as to where to spend the income thus leading to an increase in the overall satisfaction gained by the consumer.
Also, this kind of a paternalistic intervention is necessary in the case of LPG since the previous form of subsidies saw a lot of pilferage and losses for the government, according to news reports, the government stands to save an amount to the tune of Rs10000 crores in 2014-15 due to the change in the form of subsidy offered to the people for LPG.
Roshni Grover (2249)
Direct Benefit Transfer for LPG consumer (DBTL) is the scheme aimed to improve the subsidy administration of LPG across the country. As per this scheme an LPG consumer will get his/her cylinder at full market price and the differential between subsidized price and full market price i.e. the subsidy will be transferred to his/her bankaccount upto a capped limit(9 cylinders in a year) .
Will the average beneficiary spend the transferred amount on LPG ?
According to the amendments to the Finance Bill, the income shall include "assistance in form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by the central government or state government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset".
A Game Changer
Government believes that the Direct Cash Transfer or Direct Benefits Transfer is likely to be a game-changer in more than one way.
The Centre releases as much as Rs 2, 00,000 crore as subsidies under various schemes for the targeted sections across the country. Therefore it is within its right to devise methods to reach beneficiaries the way it wants.
Firstly, the Direct Benefits Transfer (DBT) scheme is aimed at cutting the bloated subsidy bill of Rs.1, 64,000 crore. India’s budget deficit was 5.8 per cent of gross domestic product in the financial year ending 2012 March.
Secondly, unlike other welfare scheme launched so far by the Centre, DBT helps in timely and quick transfer to intended beneficiaries.
A Game Changer
Government believes that the Direct Cash Transfer or Direct Benefits Transfer is likely to be a game-changer in more than one way.
The Centre releases as much as Rs 2, 00,000 crore as subsidies under various schemes for the targeted sections across the country. Therefore it is within its right to devise methods to reach beneficiaries the way it wants.
Firstly, the Direct Benefits Transfer (DBT) scheme is aimed at cutting the bloated subsidy bill of Rs.1, 64,000 crore. India’s budget deficit was 5.8 per cent of gross domestic product in the financial year ending 2012 March.
Secondly, unlike other welfare scheme launched so far by the Centre, DBT helps in timely and quick transfer to intended beneficiaries.
A Game Changer
Government believes that the Direct Cash Transfer or Direct Benefits Transfer is likely to be a game-changer in more than one way.
The Centre releases as much as Rs 2, 00,000 crore as subsidies under various schemes for the targeted sections across the country. Therefore it is within its right to devise methods to reach beneficiaries the way it wants.
Firstly, the Direct Benefits Transfer (DBT) scheme is aimed at cutting the bloated subsidy bill of Rs.1, 64,000 crore. India’s budget deficit was 5.8 per cent of gross domestic product in the financial year ending 2012 March.
Secondly, unlike other welfare scheme launched so far by the Centre, DBT helps in timely and quick transfer to intended beneficiaries.
Thirdly, the transfer of direct cash into account of targeted beneficiary is a winning proposition for the recipients as it aims to eliminate middlemen in various government sponsored welfare schemes and subsidized food, fuel and fertiliser schemes. Take for instance, it's estimated that public coffers can be richer by several crore yearly just by switching to cash handouts for LPG and kerosene, a proposed move that would also curb diversion of subsidised cylinders for commercial use and diesel adulteration with inexpensive kerosene. Bringing all subsidies under DBT's ambit can be the major fiscal game-changer the economy needs very much.
Fourthly, the Direct Benefits Transfer scheme is likely to be simple and error free. On the basis of Aadhar cards money is deposited in beneficiaries’ accounts.
It is not necessary that the average beneficiary spends the transferred amount on LPG. It will depend upon his preferences.He may spend that money on a good which is more preferred to him.
On the issue of consumption behaviour ,it is more likely to be less attractive to the consumers. As mentioned in the report 'Official data show that cooking gas consumption during the January-June period grew at a slower 7.82%, nearly four percentage points less than 11.4% growth in the same period last year.' While buying the gas cylinder the consumer thinks of the price, which is higher than earlier subsidised price.Price is the main constraint in tracing the individual's consumption behaviour. While it may be difficult for some to afford at the market price ,it may be a matter of no concern for some.
Since LPG is a by-product of a non-renewable resource i.e.petrol .It can be put under the ambit of paternalistic interventions.And yes if the government is facing extreme losses it should go for that.
1)Will the average beneficiary spend the transferred amount on LPG?
A)Before we answer this question we must check whether the consumer is receiving the subsidy amount through DBTS without any delay.Assuming the consumer receives the amount through DBTS I answer this question, yes, the average beneficiary is most likely to spend the transferred amount on LPG since the market price of LPG is more than the subsidized LPG.
2)How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behavior?
A) The consumption of the LPG would be reduced because of the DBTS as the consumer now has choice to spend the amount on a different good.
3)Is it necessary for paternalistic intervention in consumption behavior?
Yes, it is necessary for paternalistic intervention since LPG is a exhaustible source of energy.
The DBTS has greatly curbed spurious gas connections, reduced losses for the exchequer and increased profits for the fuel marketing companies as the demand for LPG cylinder at market price has shot up.However, the important point to note here is that the DBTS has been primarily been implemented only in the urban areas. The real challenge lies in taking it to the rural areas which form the heart and crux of India.
1) First and foremost, in urban areas, LPG is a necessity as in today's contexts there are few other viable substitutes. However this is not the case in rural areas. People in most remote areas still use firewood or kerosene stoves to cook. Therefore,they might not use the money transferred to their bnk accounts for buying LPG as they have other feasible alternatives. Therefore this increase in income may be used to increase consumption of other essential goods. This may not prove beneficial for the fuel marketing companies in the long run.
2) Secondly, the level of financial literacy among the illiterate poor in the rural areas is bare minimum. Therefore, though the Pradhan Mantri Jan Dhan Yojana may have opened bank accounts for crores and crores of Indians, it is an undisputable truth that most of these people have no clue how to operate a bank account and thereby benefit from the DBTS. Why, even my maid in Chennai was absolutely clueless about the scheme. She came to my parents and asked them how to encash the money 'Modi has tranferred to her'! When the situation is bad enough in urbn areas, think about rural areas.
3) Thirdly, I strongly feel that there should be a paternalistic intervention as it is necessary in a country like India but in a different way The government should lay down gas pipelines through out the country and then implement the DBTS to enable people to pay for the gas. This would make the process a whole lot simpler. Moreover the laying down of gas pipelines would provide employment to millions and would be an apt substitute to economically unproductive programmes like MGNREGS.
The DBTS scheme leads to an increase in the price of LPG leading to a Pivotal shift in the budget line now the intersection point is lower. the government now transfers the amount to beneficiaries account leading to an upward movement of budget line as there is a difference in income and price elasticities there will be a change in consumption as the consumer will not spend the entire amount on buying LPG especially among lower income urban houseolds whoes income and price elasicities are higher
ANALYSIS
By
Harjas Singh (ID No.-2226)
Akashdeep Singh (ID No.-2201)
Chitwan Sharma (ID No.-2220)
Suyash Ojha (ID No.-2265)
We have analysed this problem through the perspective of an average Indian LPG consumer.
We found out that the annual per capita income of India is 88,533 (http://profit.ndtv.com/topic/per-capita-income).
The data shows that the price of LPG cylinder was initially ₹417, which was a subsidised price. When the government implemented the DBTS, the subsidy worth ₹209.5 was transferred directly to the bank account of consumers. Thus, they had to purchase LPG cylinder at market price, which was ₹626.50.
Also, we have assumed that consumer bought 12 LPG cylinders initially.
Thus, the consumer spent ₹5004 per year on LPG cylinder initially, while spending ₹83529 on other goods. Now, with increase in price of LPG cylinder, quantity demanded by the consumer will change. As the price elasticity of an average consumer is approximately 1 (as given in the data), the consumer will consume 6 units of LPG cylinder (applying the formula of price elasticity of demand).
Buying LPG cylinders at market price, the consumer will spend ₹7518 per year on LPG cylinder (and spending ₹81015 on other goods). Further, the government will transfer ₹2514 per year to the consumer.
Now, when the consumer buys 6 cylinders at subsidized rate, he will receive ₹1257 as subsidy. Thus, his income will increase from ₹88533 to ₹89790. Thus, he may use his increased income to buy more LPG cylinders.
Taking the average income elasticity of demand of an average Indian consumer of LPG to be 0.7, we observe that the consumer will increase his consumption by 0.06 (which is negligible).
Now, coming to the questions:
Q. Will the average beneficiary spend the transferred amount on LPG?
A. As we observed, he will spend negligible, if any, of the transferred amount on LPG.
Q. How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour?
A. The consumer behaviour has been largely affected by this change in price. He reduces his consumption from 12 units to 6 units.
Q. Is it necessary for paternalistic intervention in consumption behaviour?
A. Yes, we believe that this intervention is necessary. The government spends a lot on subsidising LPG cylinders. As this intervention has led to a reduction in the consumption of LPG cylinders, the government's subsidy budget is reduced. Now it can utilise this money to launch welfare schemes of the poor, who actually deserve government help.
Thus, we used indifference curve analysis to show how consumer behaviour would be impacted by the Direct Benefit Transfer Scheme of the Government of India.
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By
Harjas Singh (ID No.-2226)
Akashdeep Singh (ID No.-2201)
Chitwan Sharma (ID No.-2220)
Suyash Ojha (ID No.-2265)
The purpose of Direct Benefit Transfer Scheme is to ensure that benefits go to individuals’ bank accounts electronically, eliminating the need of middlemen in the process of fund flow and thus reducing delay in payment. It also ensures accurate targeting of the beneficiary. Duplication is reduced and there is more transparency by opening up of bank accounts.
As the benefit from purchasing LPG increases, the expenditure on it also increases. It also increases the purchasing power of the consumer.
But the income of the average beneficiary will not go fully to purchase the LPG.
He/she may shift to other goods after having maximum satisfaction and requirements fulfilled in the long run.
Poor section will switch to purchase some other good which will give them same or more level of satisfaction. However, the richer section will be least affected by it.
The paternalistic intervention in consumption behavior is important as it results in overall development of the economy connecting more people with the scheme.
DBTS or Direct Benefit Transfer Scheme aims at bringing transparancy and terminate pilferage from the funds sponsored by the Central Government.LPG subsidy is a program part of DBT.It is an Aadhar linked scheme.Since it is an Aadhar linked scheme,no illegal beneficiaries could happen and thus making it corruptionless.LPG subsidy is a high price scheme.Beneficiaries are probably from the rich and middleclass families.Poor cannot afford the market price under the new scheme and also the subsidy is transferred only after making the payment thus affecting them a lot.
Rich finds this subsidy unavoidable and will be ready to pay any amount of price.But the poor are affected by it.They find it difficult to pay the market price and hence their consumption level declines.But there won't be any change in the overall consumption level as the rich and middleclass men add amounts to it.
I think it is necessary to have paternalistic intervention in consumption behaviour because there would have been some unauthorised companies selling LPG's.
For reference, here's the graph used with the above mentioned analysis.
http://imgur.com/r4eUTHd
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By
Harjas Singh (ID No.-2226)
Akashdeep Singh (ID No.-2201)
Chitwan Sharma (ID No.-2220)
Suyash Ojha (ID No.-2265)
Transferring of LPG subsidies directly to individual customer accounts has not only helped curbing, but has entirely eradicated the devils of pilferage and diversion. So ‘That’s good news!’ (pun intended). But, if we go deeper into its ramifications, we find that the sudden unpalatable 50% increase in the price of an LPG cylinder, has somewhat altered its basket of beneficiaries.
There are a lot of people from the richer sections of the society, who are availing of this subsidy by paying the increased amount comfortably. This subsidy, in turn, is increasing their purchasing power, which they are little expected to spend on consuming more LPG. People would tend to spend a larger part of this subsidy on other goods, rather than spending it solely on LPG as there would be other commodities which precedes LPG in consumers’ order of preferences for spending their money.
And because LPG is a necessary good, it is difficult to increase its consumption, or to substitute it (as better substitutes are not available) solely as a result of decrease in its price. So consumption levels are expected to increase only if new consumers enter the market through this scheme.
Also, paternalistic intervention is necessary, because a system like this would ensure that the evil practices are eliminated, or at least reduced to a great extent, the benefit reaches the intended beneficiaries, and that equitable distribution of resources takes place.
An Analysis Of The Direct Benefit Transfer Scheme – Adit Munshi (ID no. - 2197)
The DBTS in India is the world’s largest direct fund transfer system. In a country where there are 3 million LPG cylinders consumed every day, the government cannot afford to lose money via leakages, black-marketing, pilferage, corruption and duplication while affording its citizens LPG subsidies. By eliminating the various tiers involved between the government and the citizen, this scheme aims to ensure that subsidies are transferred quickly and effectively. A microeconomic study of this scheme, keeping in mind the urban middle class, raises the following questions.
Will the average beneficiary spend the transferred amount on LPG? What is the effect of buying at market price and receiving an income transfer on individual consumption behaviour?
Before DBTS, an urban middle class consumer, at the time of buying the cylinder, was paying a subsidised price of around Rs. 400. He adjusted his consumption, keeping in mind his income, and decided on a quantity that maximises his satisfaction. After DBTS, the consumer has to pay almost double. This constraints his budget and he decreases his consumption. But the DBTS, by depositing a subsidy of Rs. 568, mitigates this effect by increasing the income. The difference between price elasticity and income elasticity of a consumer comes into play here. The price elasticity urban middle class is much higher than the income elasticity. So, the consumer is less likely to spend the transferred amount on LPG.
Paternalistic intervention is required in the long run by increasing LPG production to a level where the subsidised price become the actual market price. Also, the government can intervene by developing alternate fuels.
The reason behind Direct Benefit Transfer Scheme (DBTS) is reducing the consumption of LPG gas.suppose the current price of LPG gas are 400 rupee with subsidy at this time government withdraw subsidy the price of LPG increase by 50% and consumption also decease by 50 the DBTS however partially counter this effect.suppose that because the price of LPG 800 RUPEE and per person receives 400 subsidy in your bank account .so we expect the DBTS is increase the consumption by 1.5%.With the DBTS the consumption of LPG marginally decreases and lands lower income group on a marginally lower indifference curve
The aim of the DBTS is to ensure that the subsidies are transferred directly into the consumers bank accounts, thereby eliminating delay as well as corruption caused by middlemen.
1) It is not necessary that the person will use the entire transferred amount on LPG. Removal of subsidy increases the price of LPG and rotates the budget line inward. Increase in income of the consumer will cause rightward shift of the budget line. This extra income may be used in other market baskets where the consumer is deriving more satisfaction. Therefore, demand of LPG will decrease.
2) The Scheme will affect different income groups in a different manner. For the richer groups, LPG will have a more inelastic demand as they can afford the increased price. However, LPG will be a more elastic good for the poor and they will use the transferred amount on other, more essential goods. Also, there is a lack of alternatives in urban areas but rural people can fall back on fuelwood etc. So the availability of substitutes will impact and reduce the rural demand more than the urban.
3) Such a policy is imperative for ensuring that the poor have access to LPG and also ensures their welfare by increasing their income. This is also better than the subsidy model as it reduces demand for LPG, which is a non-renewable resource.
One of the notable differences between DBC and subsidy is that it forces consumers to spend more and wait for reimbursement rather than spending less to start with. With the target of the program being primarily poor families; the impact on their cash flow is significant. They can no longer afford to purchase the same amount of LPG, because the just don't have enough extra funds; and consumption drops. The restoration of the subsidy amount, on average a week later, does little to counter this. On the whole, DBC discourages LPG consumption relative to subsidy. And with an exhaustible resource like LPG, this isn't necessarily a bad thing. However, the fact remains that the poor are able to buy a lower amount of LPG, though their overall financial well being isn't significantly impacted. The lowered consumption of course means that the government now has to pay less subsidy. This saves this govt. just as much money as some of the other factors (corruption, fake accounts etc.).
We have established that DBT is without a doubt beneficial to the government. It slightly reduces consumer utility, putting them on a lower indifference curve. This effect however, is largely offset by the benefits of DBT- namely assured cash transfer and no hassle of subsidy; which often was unavailable at the whims of the shopkeepers.
We have also seen that the consumer is likely to spend the DBT income on other goods more than LPG. This could be a mixed blessing. On one hand, a reduction in LPG consumption is good for the environment; on the other the family gets to consume less. However, it can safely be assumed that it will not cause families who need it most to go without LPG- in that case the marginal rate of substitution would be so high that they would probably spend most of the received income on LPG alone. For the rest; we needn't worry that the income doesn't all go to LPG; consumers can be trusted to choose the goods that place them on the highest indifference curve, regardless of government policies. When we subsidised LPG we never stopped to wonder weather the saved income was spent on buying more LPG. It is the same situation, viewed retrospectively.
1.) To answer IF the average beneficiary would spend the transferred amount on LPG, we have to identify the 'average beneficiary' first. As per IOC, currently, 65% of the Indian households are under LPG, with the majority being located in urban or semi-urban areas. Thus, the average beneficiary would be residing in these areas. (As per BPCL, 85% of the domestic LPG connections have been linked to DBTL) The average annual urban household income is approx. INR 2,40,000, from which we can assume that the average beneficiary would purchase the cylinder at market price, primarily because he's able to afford it even at market price and the delayed subsidy transfer does not affect his purchasing of a product which would be termed as a 'necessity' as per urban/semi urban standards, thereby, keeping his consumption level unchanged.
Hence, the average beneficiary would spend the transferred amount to make up for the difference between subsidized price which he used to pay and market price of LPG he pays now.
2.) Individual consumption behaviour would differ for the poor and rich. For the former, it may encourage them to look for LPG's substitutes depending on whether they're able to afford the LPG cylinders at market price or not and we can expect a decrease in their consumption. As for the rich, the consumption will remain unchanged.
3.) Yes, there is a need of paternalistic intervention in consumption behaviour. In this case, not only has the Govt. managed to cut down it's annual expenditure dramatically, but has also managed to provide a choice to the consumer in regard to the market basket they prefer buying, as opposed to the earlier imposition of spending the subsidy amount on LPG.
Will the average beneficiary spend the transferred amount on LPG?
The average beneficiary is unlikely to spend the transferred amount on LPG. The subsidy will lead to an increase in disposable income which will give the consumer an incentive to purchase more durable goods.
How will the mechanism of buying at market price and receiving an income transfer affect individual consumption behaviour?
For lower middle class families, buying at market price shouldn't be a problem. Demand will be inelastic in the short run. As there is a tangible increase in income levels, more and more consumers will shift to LPG.
Is it necessary for paternalistic intervention in consumption behaviour?
Yes, as far as the LPG subsidy is concerned, the scheme gives people a reason to shift to cleaner fuels. Without this subsidy, most lower income families would not have turned to LPG.
It has been observed that the overall demand of LPG has gone up in recent times. But the task here is to analyze the role of the DBTS in it. Another question which arises here is whether the DBTS has reached the targeted group or not. The government first mooted the idea of a faster sustainable and inclusive growth under the 12th five year. Implementation of the programme rests on the pillar of the Aadhaar biometric identity card.
The transferring purchasing power scheme can be advantageous and can have a socially desirable outcome in localities where there is strong infrastructure and the necessary banking facilities which is hardly the situation in most districts of our nation. A study by the Asian Development Bank found that food subsidies have resulted in an insignificant reduction in the poverty gap for India and, quite surprisingly, 70% of the beneficiaries were non-poor. Rajiv Gandhi once said that out of every one rupee spent in India, only a mere 15 percent reaches the intended group which again highlights the problem of corruption and leakages. I am concerned with the fact that whether the scheme will really help fix the problem or will it only change the method of transferring subsidies.
However it does have the advantage of reducing the administrative costs. This is because of the reason that the Aadhaar oriented system will address the problems arising due to identification and authentication errors and this has the potential to reduce the government expenditure and increase societal welfare.
Then obviously there arises the problem of whether the intended group spends the subsidy on the desired product. Human preferences are relative. What may be feasible for one may not appeal to another. It all depends on the level of satisfaction the consumer derives from the product. And then there is a multitude of substitutes that are available for LPG which may again negate the demand of LPG up to a certain extent.
In the light of the above scenario, I strongly feel that there should paternalistic intervention. It is very important to understand that need of ensuring whether this subsidy reaches the targeted group or not and whether this subsidy is being spent on the desired product or not.
First of all, its necessary to determine who the average beneficiary is. In general economic terms, when we talk of an average beneficiary, it essentially means the persons who are likely to benefit from the said scheme.
Talking in terms of behavioural economics and the statistics in this case, the average beneficiary as of today is likely to spend the transferred amount on LPG because of the understated factor
1. The identification or elimination of fake or duplicate connections undertaken by the Government would aid the channelisation of the transfer subsidy to the percentage of population who truly need it, thus an assumption can be made that those who have re-registered for the PAHAL scheme are likely to benefit in the real terms the most
Secondly, this mechanism of buying at market price and receiving an income transfer will affect individual consumption behaviour of the various income groups targeted under this scheme as this reimbursement will increase the money income available with the beneficiaries which could then be spent on other needs and essentials of the consumer
Thirdly yes, there is an absolute necessity for paternalistic intervention in consumption behaviour atleast for a set of essential commodities especially in poverty stricken country like India because of the simple reason that this allows the creation of economic safety nets for the people who are mostly dependent on government subsidies and transfer for meeting their daily consumption necessities.
A secondary reason is that in this specific case of DBTL, it is only in consonance with its national & international commitments for the government to promote the use of cleaner and greener fuels and this scheme which essentially targets a certain impoverished section of the society who also account for the majority of the population. It is only logical for the government to undertake paternalistic intervention in the consumption behaviour of its citizens
The Direct Benefit Transfer Scheme is surely a benefeciary scheme introduced by the government. It surely intends to reduce corruption and keep more money in the pocket of poor.
But looking into the issue of LPG subsidy, the DBT wants to target the poor sections of the society or intends to reduce any kind of inequity but is not able to achieve it.It is not necessary that the person will use the entire transferred amount on LPG. Removal of subsidy increases the price of LPG and the demand curve will shift leftwards. Increase in income of the consumer will cause rightward shift of the budget line. This extra income may be used in other market baskets where the consumer is deriving more satisfaction so the expenditure pattern cannot be necessarily determined.
The Behavior of consumers towards receiving an incoming transfer differs depending on the economic class of the society. The richer sections of the society might not find a significant change in their income after the transfer, so they might not change their consumption pattern.For the richer groups, LPG will have a more inelastic demand as they can afford the increased price. The poorer sections of the society might save the money for future expenditure or allocate the resources in buying other essential goods for their requirement, however, LPG will be a more elastic good for the poor and they will use the transferred amount on other, more essential goods.
Yes, there is a need of paternalistic intervention in consumption behaviour. With this government has managed to cut down its annual expenditure dramatically.
The subsidy that a consumer gets after the consumption of the LPG isn't used by him/her completely as he might opt to use it elsewhere according to his other needs.
Direct Benefit Transfer scheme aspires to eradicate the black market of LPG, yet the commercialization might have an impact on its reach to remote areas of the country.
the DBTL scheme was created in order to remove incentive for diversion of domestic cylinders for commercial use, protect entitlement and ensure subsidy to the consumer, improve the availability/delivery of LPG cylinders for genuine users and to weed out fake/duplicate connections.but still in this scheme the process of providing the customer subsidy does not prevent diversion. we can say diversion means black marketting or consuming cylinders, If distributors were diverting cylinders in collusion with consumers who did not consume their quota, they can continue to do so. If non-genuine customers were claiming subsidised cylinders, nothing in the reengineered process has altered the ability to recognise genuine consumers from non-genuine. The non-genuine customers can, therefore still continue to consume subsidised domestic cylinders, thus diverting them from genuine consumers.but after introducing PAHAL scheme, a new version of DBTL. This scheme will reduce or prevent the unauthorised sale of LPG cylinders at higher rates. The purchase of multiple gas connections will be prevented. Accordingly, the subsidy burden for the Government will be reduced.
Eliminating fake LPG connections will lead to undeserving people (i.e. non-members of the target group) getting cropped out of the picture facilitate the scheme to target the desired beneficiary.
Secondly, this mechanism of buying at market price and receiving an income transfer will affect individual consumption behaviour of the various income groups targeted under this scheme, as this subsidy will cause the personal disposable income to rise. Thus, the target group can spend this increased income on consumption of other goods.
Yes, there is a need for paternalistic intervention in consumption behaviour for a set of essential commodities, aimed at specific target groups (in this case, the economically weaker sections of society) because this allows the those people who are mostly dependent on transfer income and subsidies for meeting their daily consumption necessities to spend a decreased portion of their income on these goods, allowing them to retain and use a greater part of their income for meeting other expenses.
The Direct Benefit Transfer scheme is beneficiary in the sense that it achieves two objectives.
1.) It helps in eliminating corruption. The previous practice of LPG subsidies led to large scale corruption because of the redundant involvement of middlemen. The DBTS involves transferring the subsidy amount directly to the bank account of the consumers. This will lead to greater transparency, thus benefiting both the government and the consumers.
2.) It gives the consumer the chance to choose. The consumer can use the DBT amount as per his preferences, i.e, he can use it on LPG or on other goods. It is almost always the latter for low income consumers. It also enables the consumers to look for substitutes to LPG, thus achieving the aim of the government to reduce LPG consumption without adversely affecting the interests of the consumers.
Yes, there is a need for paternalistic intervention as allowing a market free of subsidies for LPG will mean that the equilibrium price will be too high for the majority of the consumers in a poverty stricken country such as India. Therfore, adequate government intervention is an absolute must for an essential and expensive commodity like LPG.
The average beneficiary of the DBT might not use the transferred amount on consumption of LPG. The consumer behaviour would depend on the consumer's income. Lower income consumers, for whom the transferred amount is proportionally high as compared to their income, might not spend on LPG, but instead on other desired goods and services which might have been previously out of their reach. Higher income households may spend the transferred amount on LPG itself.
If the consumer was on a particular budget line earlier, when the LPG was subsidised, upon removal of subsidy, the budget line will rotate inward on the axis where LPG consumption is being considered. The new market basket will have less of LPG and more of other goods. When the consumer gets the DBT, his income increases, which will make the new budget line shift out parallel. The new indifference curve thus obtained will still be lower than the original indifference curve and thus the consumer will, at the end, be at a lower level of satisfaction. The consumer will consume less of LPG than he did at the subsidised price. The above analysis has been done using the values for price and income elasticties of an urban middle class consumer. It will vary as per the elasticites of different income groups.
Yes, paternalistic intervention of this sort is necessary on part of the government because (1) it puts within the reach of lower income groups goods which they could not have afforded in the absence of any intervention (2) intervention of this particular sort is important as it eliminates chances of misdirection of funds and makes sure that the intended result is brought about. (3) Also, giving the consumers an increase in their purchasing power, instead of a subsidy, gives them the option of choosing to use that money on goods other than LPG, if that;s what they consider is best to do.
The Direct Benefit Transfer Scheme was introduced to eliminate the middlemen. The questions that are arise are whether the money transferred will be used for to purchase LPG cylinders and hot this scheme influences the behaviour of consumers. The usage of the money depends on the income level of the groups. Lower income groups might use the money to purchase other goods as well due to the apparent increase in purchasing power. On the other hand, the consumer behaviour of the higher income groups will not change much as they are already able to afford the basic necessities. As the proportion of lower and middle income groups is larger in india, the overall demand for LPG reduces.
A paternalistic intervention is needed as a free market would place the equilibrium price too high for the lower income households to afford it. Hence , for an expensive and yet essential product such as this, it is essential for the govt. to intervene.
The introduction of the Direct Benefit Transfer Scheme will be beneficial for the recipients of the subsidy as the amount of subsidy to be transferred now will rise because of the elimination of the Middlemen which previously were involved in the chain, previously deployed for the transfer of the Subsidy. Also, there will be a greater transparency and accountability and as specified, lesser wastage of funds because the Bank accounts will be attached to Aadhar Cards which will ensure by its Unique Identification Methodology transfer of the funds only to the actual recipients.
The decision to spend the received amount on LPGs would be dependant on the level of income of the beneficiary. The poor strata is more likely to not spend a large chunk of the subsidy received on LPGs and rather on a wide range of other necessities while the the higher strata of the society would like to spend their income on purchasing further LPGs. There would not be one way of expending the amount received and thereby, no one Consumer Behaviour. But the behaviour which can be predicted to be certain is that almost none of the Consumers would spend the whole of the amount on the further purchase of LPGs.
This Paternalistic Behaviour is essential by the fact that the poor can now afford what they could not earlier. Because of the creation of this safety net, a large portion of the amount they spent on one key good could now be spent over an array of other essentialities. This behaviour will hold true at least among the poor but not much for the rich. Also, the money that they paid as tax would now be utilised more efficiently and they will be benefited in the end. On the other hand, government will now be seen to be working more effectively with more funds in hand out of the same tax basket.
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