Page 3 - Can Subsidies be a Tool for Strengthening the Improved Cookstoves Market?
P. 3
Policy Brief
Stakeholder Role in value chain Intent of subsidy
Manufacturer
Developing technology; supplying improved cookstoves to distributors Subsidizing cost of technology development
Distributor as per demand
Rural entrepreneur Maintaining an inventory of stoves; arranging for transportation to Absorbing taxes incurred during inter-state transport of stoves
NGO entrepreneurs
Financial institution Last mile delivery; post-sales service Absorbing taxes and providing a higher profit margin on sale of cookstoves
End user
Awareness generation; training end-users; usage monitoring Subsidizing cost of manpower and communication material for awareness
generation and monitoring
Providing end user finance
Purchase and use of the stove Absorbing the interest rate of end user loans to make loans risk-free
No direct subsidy
Profit margin of retailer Cost (`)
Interest charged by financial institutions on 6000
end user loans 5000
In effect, the end user pays the basic manufacturing cost of
the improved cookstove. Simultaneous efforts were made 4000
to make many of these costs low or redundant by the end
of the programme. For instance, the improved cookstoves 3000
market is seeded across the country, awareness generation
would occur through self-sustaining demonstration effect 2000
rather than through an external agency. Similarly, as the
volume of sales increase due to increased demand, fixed 1000
costs, such as the cost of transportation per stove, will
reduce. TERI also worked with State governments towards 0 2012 2013 2014 Year
reducing the value-added tax charged on cookstoves by 2011 TERI SPT-0610
almost 8 percentage points in some states. On the other
hand, TERI invested in research and development on Cost (`)
materials and the manufacturing process of improved 1600
cookstoves, bringing down the manufacturing costs over
time. After four years of the programme, it was seen 1400
that the selling price of improved cookstoves had actually
reached parity with its initial manufacturing cost at the 1200
beginning of the programme (see Figure 1).
1000
A similar strategy for determining the amount of
subsidies may be adopted under the UCA if it aims to foster 800
market development of improved cookstoves. Subsidies
may be used to cover the cost of market development 600
and the supply chain costs, so that users can purchase
improved cookstoves at its manufacturing cost. However, 400
for this strategy to be successful, the government must
simultaneously make efforts to bring down the subsidized 200
costs, so that the supply chain can sustain without external
support by the end of the programme. 0 2012 2013 2014 Year
2011
TERI SPF-0143
Manufacturing cost Maximum retail price
Figure: Variation in manufacturing cost and maximum retail price in two cookstove
models over 4 years
APRIL 2015 3
Stakeholder Role in value chain Intent of subsidy
Manufacturer
Developing technology; supplying improved cookstoves to distributors Subsidizing cost of technology development
Distributor as per demand
Rural entrepreneur Maintaining an inventory of stoves; arranging for transportation to Absorbing taxes incurred during inter-state transport of stoves
NGO entrepreneurs
Financial institution Last mile delivery; post-sales service Absorbing taxes and providing a higher profit margin on sale of cookstoves
End user
Awareness generation; training end-users; usage monitoring Subsidizing cost of manpower and communication material for awareness
generation and monitoring
Providing end user finance
Purchase and use of the stove Absorbing the interest rate of end user loans to make loans risk-free
No direct subsidy
Profit margin of retailer Cost (`)
Interest charged by financial institutions on 6000
end user loans 5000
In effect, the end user pays the basic manufacturing cost of
the improved cookstove. Simultaneous efforts were made 4000
to make many of these costs low or redundant by the end
of the programme. For instance, the improved cookstoves 3000
market is seeded across the country, awareness generation
would occur through self-sustaining demonstration effect 2000
rather than through an external agency. Similarly, as the
volume of sales increase due to increased demand, fixed 1000
costs, such as the cost of transportation per stove, will
reduce. TERI also worked with State governments towards 0 2012 2013 2014 Year
reducing the value-added tax charged on cookstoves by 2011 TERI SPT-0610
almost 8 percentage points in some states. On the other
hand, TERI invested in research and development on Cost (`)
materials and the manufacturing process of improved 1600
cookstoves, bringing down the manufacturing costs over
time. After four years of the programme, it was seen 1400
that the selling price of improved cookstoves had actually
reached parity with its initial manufacturing cost at the 1200
beginning of the programme (see Figure 1).
1000
A similar strategy for determining the amount of
subsidies may be adopted under the UCA if it aims to foster 800
market development of improved cookstoves. Subsidies
may be used to cover the cost of market development 600
and the supply chain costs, so that users can purchase
improved cookstoves at its manufacturing cost. However, 400
for this strategy to be successful, the government must
simultaneously make efforts to bring down the subsidized 200
costs, so that the supply chain can sustain without external
support by the end of the programme. 0 2012 2013 2014 Year
2011
TERI SPF-0143
Manufacturing cost Maximum retail price
Figure: Variation in manufacturing cost and maximum retail price in two cookstove
models over 4 years
APRIL 2015 3
