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How to Target Electricity and LPG Subsidies in India: Step 1. Identifying Policy Options

Publication Overview

How to Target Electricity and LPG Subsidies in India: Step 1. Identifying Policy Options

Key Messages

  • Major gaps in knowledge are limiting better targeting of energy access subsidies in India. The latest distributional analyses of energy consumption subsidies—that is, how benefits are shared across different income groups—are based on 2011 census data that are now significantly dated.
  • This report identifies a number of specific targeting interventions that could better target energy subsidies. It calls for dedicated research to estimate the distributional performance of existing subsidies and various targeting options in order to better inform policy design.

India’s energy access policies have succeeded in achieving almost universal electricity access and a massive uptake in clean cooking. Connection and consumption subsidies for electricity and liquefied petroleum gas (LPG) have played an important role in driving these changes. But the policies are also costly: in 2017, electricity and LPG consumption subsidies alone cost INR 87,830 crore (USD 13.1 billion).

Efforts have been ongoing for years to reduce costs by better targeting subsidies. Most recently, this includes discussions around a Direct Benefits Transfer for Power (DBT-P) for electricity and a possible “Ujjwala 2.0” for LPG. In many cases, however, knowledge gaps are limiting evidence-based decision-making. The last distributional analysis of energy consumption subsidies—that is, how benefits are shared across different income groups—is based on the 2011 census. It is also unclear who would be included or excluded under different targeting approaches.

This report calls for dedicated research on targeting energy subsidies to better inform policy. This includes data collection and analysis in the following areas:

  1. Estimating the distributional performance of existing subsidies.
  2. Identifying and evaluating targeting interventions. Based on a review of options, this paper recommends that this should include:
    • Opt-out schemes
    • Quota-based and volumetric targeting
    • Categorical targeting
    • Income-, asset- and consumption-based targeting, including related proxies.
  3. Evaluating opt-in schemes.
  4. Exploring how basic income transfers affect energy consumption.

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