How to Target LPG Subsidies in India

Based on a survey of over 900 households in Jharkhand, this report finds that LPG subsidies are not well targeted and that poor households in Jharkhand can receive 2 times less in LPG subsidies than better-off consumers. The poorest 40% of households in rural and urban parts of Jharkhand received less than 30% of government LPG support in 2018/19 when LPG subsidies comprised nearly 28% of all Central Government energy subsidies. Since May 2020, LPG subsidies per cylinder have been effectively removed. At the same time, the COVID-19 crisis has severely affected incomes, further stressing the need to provide support for affordable clean cooking for the most vulnerable. The research analyzed strategies to improve LPG subsidy targeting but did not identify a “magic bullet” for easily improving LPG subsidy distribution among poor households. The main bottleneck in improving subsidy distribution appears to be the low consumption of subsidized LPG cylinders among poor households and the high consumption among better-off households. Until reasons for low consumption by poor households are better understood and addressed and an effective way is found to restrict benefits for better-off consumers, policy-makers can consider applying volumetric targeting to continue to limit overall subsidy expenditure. Since the COVID-19 crisis began, many households in India have seen a dramatic fall in incomes and are anticipated to fall back into poverty. Coupled with Jharkhand’s existing high levels of poverty, this strongly suggests that the choice of any new targeting mechanism when LPG subsidies are reintroduced must be undertaken with care to not increase the hardships for any poor households. The report recommends making energy access fairer for poor households by encouraging the Central and state governments to analyze who benefits most from LPG subsidies and test different strategies to improve targeting when they are reintroduced.