Using Targeting to Replace Distortionary Subsidies: Direct Benefit Transfers for Electricity

India has been at the forefront of a movement to replace traditional in-kind or goods subsidies with cash transfers. The immediate benefit of such a change is to reduce leakage: the amount of a benefit that does not reach the beneficiary (Muralidharan, 2016; Barnwal, 2022). Yet there is a greater potential benefit that has not yet been realized, which is using direct transfers to correct the distortions caused by subsidizing goods like fuel, electricity and fertilizer. In the electricity sector, for example, large subsidies lead farmers to consume the wrong amount of groundwater, with large attendant losses in income (Ryan and Sudarshan, 2022). The potential of such Direct Benefit Transfers-as-replacement programs is vast because they would rely on funds already spent on distortionary subsidies. Indian states, for example, spend USD 20 billion on electricity subsidies per year.

The researchers propose to adapt and pilot a policy innovation of Direct Benefit Transfers for Electricity (DBTE). Under DBTE, farmers receive a specific electricity entitlement and are paid a transfer for each unit of power saved below this entitlement. The DBTE therefore sets a marginal electricity price without requiring farmers to pay bills, which is a political non-starter in many states. The researchers have been piloting this program as an RCT in Punjab since 2019. The researchers will adapt a new policy pilot for the Government of Andhra Pradesh (GoAP) in one district. The high capacity and preparedness of the GoAP make the program highly scaleable. While they will calculate the energy saved, the researchers will also calculate the greenhouse gas emission abated by this intervention, thus contributing to climate mitigation. The DBTE program will provide an incentive to farmers to efficiently use water and secure water resources for irrigation in times of drought or unpredictable rainfall patterns as part of their climate change adaptation strategy.