Opinion How LPG subsidy can be redesigned to privilege low-income households

However, when it comes to increasing the LPG refill take-up of low-income, PMUY households, the current design of PAHAL may not be adequate.  Particularly, paying the full refill price (unsubsidised price) upfront makes it difficult for PMUY consumers, who face a “liquidity constraint”, to purchase refills regularly. Can the design of the existing LPG refill subsidy programme be altered to provide LPG subsidies more effectively and yet be fiscally neutral?

Using the LPG refill consumption data of all three oil marketing companies for two years (2018 and 2019, when the LPG refill subsidy was universal and pegged to the market price, keeping the subsidised price constant) for the entire Indore district, we find that PMUY and non-PMUY consumers respond differently to the refill market prices. An increase in LPG refill MRP (unsubsidised market price) should not reduce refill purchase when the subsidy is deposited in the customer’s bank account later through PAHAL, but this is not true for PMUY consumers. Hence, even when the bank-deposited refill subsidy increases in tandem with the market price (until early 2020), the refill purchases of PMUY consumers falls.

The data show that low-income households are sensitive to the amount and timing of refill subsidy, even when the post-subsidy price of gas does not change. A Rs 100 increase in the per refill subsidy decreases monthly refill consumption by about 25 per cent for PMUY consumers. The likely reason is the liquidity constraint — if the subsidy is high, this means that there is a large gap between what the household has to pay upfront and the net price after the delayed refill subsidy transfer (after five-seven days of refill purchase).

Our data indicate that the cash-back nature of the refill subsidy is a key factor behind low refill purchases by liquidity and credit-constrained PMUY households. In addition, households are not well informed about the timing and logistics of receiving subsidy transfers. Further, credit constraint, especially since PMUY consumers are more likely to earn their living on a daily or weekly basis, results in binding liquidity constraints.

It is, therefore, not only imperative to provide a substantive, targeted refill subsidy to PMUY households but also consider alternative designs of LPG refill subsidy that reduce the immediate cost of purchasing the refill. Pradhan Mantri Garib Kalyan Yojana (PMGKY) is a case in point. The programme provided up to three free LPG refills to PMUY beneficiaries in 2020, between April 1, 2020 and December 31, 2020. PMUY beneficiaries were credited with the advance (upfront subsidy) for buying LPG refills. Our analysis shows a spike in PMUY average refills consumption in April 2020. At the same time, there was no change in non-PMUY consumption — almost wiping out the gap in refill consumption between PMUY and non-PMUY consumers. Moreover, we observe a 20 per cent increase in LPG usage among PMUY households even after this upfront subsidy ends in December 2020. This suggests that a substantive targeted and upfront subsidy may lead to habit formation and thereby a permanent increase in clean fuel take-up, thus allowing for quicker phasing out of the LPG refill subsidy programme.

How can we shift to an on-time subsidy transfer without leakage of benefits away from the intended beneficiary? There are two possible fin-tech-based solutions for reducing the temporary financial burden of the purchase of LPG refill and ensuring that low-income consumers do not have to pay the subsidy amount out of pocket.
One, electronic payment of subsidy amount to the dealer/deliveryman at the point of refill purchase by PMUY consumer. A step for obtaining the consumer’s consent for this subsidy transfer can be embedded (for example, using an automated text or voice message over the phone). Upon confirmation of the subsidy transfer, both the delivery agent and consumer should receive a message notifying it, so that the delivery agent can’t charge more than the subsidised price.

Two, use digital rupee (e-RUPI). The recently launched, purpose-specific digital currency by the RBI fits particularly well, where a digital voucher worth the subsidy amount can be provided to PMUY users beforehand via SMS or QR code. At the time of refill purchase, the consumer will provide the digital voucher to the dealer/delivery man. Since the e-RUPI voucher can be restricted to the specific type of merchant (that is, OMC distributors) it addresses concerns about diversion of the subsidy by households. Alternatively, a RUPAY debit card (issued with Jan Dhan accounts) can be used for advance transfer of the refill subsidy.

Given that an upfront subsidy transfer can increase the demand for LPG refills significantly, it becomes important that the Ministry of Petroleum and Natural Gas and Ministry of Finance combine digital technology with PAHAL and PMUY targeting. Considering the health and time-saving benefits, particularly for the women and children in low-income families, the benefits of removing the delay in subsidy transfer are likely to be huge, even without any increase in the fiscal burden.

Afridi is professor of economics at ISI Delhi and visiting professor at the Munk School of Global Affairs and Public Policy, University of Toronto. Barnwal is assistant professor of economics at Michigan State University