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- Welfare programmes often observe a high rate of leakage of public funds. Many developing countries subsidise access to essential commodities with in-kind transfer programmes, where beneficiaries receive goods at a subsidised price while non-beneficiaries have to pay the market price.
- The design of traditional in-kind transfer programmes itself, when it leads to a ‘dual pricing’ regime, may provide arbitrage incentives to intermediaries to divert and resell subsidised goods to non-beneficiaries
- This brief discusses the outcomes of a study evaluating a key policy change aimed at curbing leakages in India’s cooking fuel (LPG) subsidy programme. Household LPG is provided at a low, subsidised price to households, while commercial LPG users have to pay a much higher price.
- The findings show that bridging the price gap by transferring subsidies directly to verified beneficiaries reduces the purchase of household LPG by 11-14%. Further, a reduction in a diversion of household LPG led to high prices in the black market, confirming the supply shock. Commercial LPG purchases also respond to the shortage of diverted households LPG refills in the black market.
- Further, welfare delivery programmes in developing countries can be made more efficient with policy reforms which can address the economic incentives for corruption and fraud.