Fuel subsidy: Evasion under changes in point of provision

Project Active from to Energy

The increasing burden of subsidies is a leading concern for policymakers across the world. Growing subsidy burden holds significant fiscal implications. Nonetheless, any attempt to reform subsidy policies invites univocal opposition from all the quarters.

Particularly in developing countries, debates on fuel subsidies invoke strong passions since a significant proportion of income is spent on fossil fuels. A great opportunity to decrease the financial burden of subsidies lies in minimising leakage and diversion of subsidies.  In India, varying estimates suggest there is more than 50% leakage in the public delivery system. As about 2% of GDP being spent on energy subsidies, this translates into a significant loss to the exchequer. Differential prices of the same commodity provide great incentives to the distributors and delivery-men to exploit loopholes to divert the subsidised good to the commercial sector and make a profit.

This study focuses on whether direct transfer of subsidy helps in reducing leakage and, if so, how much subsidy leakage can be avoided by providing the subsidy directly to the household’s bank account. The impact of direct subsidy transfer in the parallel black-market for the subsidised commodity is also evaluated.

India introduced the Direct Benefit Transfer for Liquid Petroleum Gas (DBTL) programme in June 2013. DBTL policy decouples subsidies disbursement from over the counter liquid petroleum gas (LPG) refills sales and facilitates direct subsidy transfer to the households. DBTL policy was being implemented in phases across the country and had covered 291 districts by January 2014. However, in a sudden development, the central government announced to terminate the programme from March 2014. This sudden change in policy provides an additional opportunity to look at the impact of policy reversal on leakage.

Policymakers in developing countries need empirical evidence to justify high investment in strengthening state capacity with better identification systems for more efficient public service delivery and transfers. This project aims to contribute directly to this by providing the first empirical evaluation of a unique identifier based country-wide public delivery program. It will add to small but growing empirical evidence on corruption in developing countries. Broadly, the setup relates to tax evasion literature in public finance and allows an opportunity to test dependence between the point of provision of a subsidy and subsidy leakage. The analysis will be particularly relevant in the context of carbon taxation policy, where the role of a point of provision of subsidies has not been paid due attention in policy debates.