Business
LPG subsidy: Make choice opting in, not opting out
By
Nihit GoyalIt was believed that Finance Minister Arun Jaitley would withdraw the
LPG (liquefied petroleum gas) subsidy for those who fall in the
30-percent tax bracket. However, this budget included no such measure.
Thereafter, Prime Minister Narendra Modi has repeatedly called on people
to "give it up" and join the "opt out of subsidy" scheme. While over
300,000 consumers have thus far enrolled in this scheme, this is a tiny
fraction of the 150 million LPG users in the country.
Using
insights from research in behavioural economics could increase
enrollment and thereby reduce the annual public expenditure on LPG
subsidies, which is at present Rs.20,000 crore ($3 billion).
Though
a rational individual is unlikely to give up an optional subsidy, it is
well known that human decision-making is influenced by factors such as
social preferences, belongingness, desire for status, and biases. This
scheme appeals to social preferences and belongingness by inviting
citizens to show "care and concern towards the less privileged" and
contribute to "nation building". Further, it taps into the desire for
status by listing those who opt out in an online Scroll of Honour.
However, it does not incorporate evidence on biases into its design.
A
bias is a systematic error in judgement that results in a deviation
from rational choice. While biases may lead to more effective
decision-making when speed is more essential than accuracy, they can
also result in misperception, illogical interpretation, and poor
judgement. The work of David Kahneman, Amos Tversky and others has
highlighted the prevalence of biases in decision-making and illustrated
their implications for modern economic theory. One bias that could
directly affect the outcome of the subsidy scheme is the default bias.
The
default bias states that people have a strong tendency to go along with
the default option. This bias can be seen in action in case of always
picking a particular seat at the dining table or sticking to the
manufacturer settings on a new phone. However, research suggests that
people tend to choose the default even when the stakes are much higher,
such as in selecting a healthcare plan or a retirement savings scheme.
Thus, the choice of default is an important policy consideration.
In
their book Nudge, Richard Thaler and Cass Sunstein illustrate how an
insight into default bias can increase organ donation. In the US, an
explicit consent is required to enlist a person as a donor, making
non-consent the default. As a result, though studies suggest that over
80 percent favour organ donation, the share registering for the
programme is far less, at about 40 percent. In contrast, many European
countries that presume a person to be a donor, unless the person chooses
otherwise, witness much higher enrollment.
How can the LPG subsidy scheme take advantage of default bias?
Rather
than giving people the choice to opt out, the government could set the
market price of LPG as the default (or, as suggested by CEEW - Council
on Energy, Environment and Water - specify a different default based on
economic categories) and allow people to opt in for the subsidy instead.
This may have happened to some extent with the introduction of the
Direct Benefits Transfer for LPG scheme (DBTL), whereby a consumer must
link her LPG account with an Adhaar or bank account to opt in for the
subsidy. However, as voluntary surrender of the subsidy was not a goal
of DBTL, its messaging does not borrow from social psychology to achieve
this objective.
Implementation of a new opt in scheme at this
point may be challenging - it should not unduly burden or exclude those
in need of the subsidy while also ensuring low administrative overhead
for oil companies. As the LPG consumer base will continue to witness
significant growth in the future, a starting point could be to exclude
new subscribers unless they explicitly opt in for the subsidy. An
alternative could be a pilot opt in scheme through distribution
franchisees that cater primarily to the affluent. Given the widespread
use of mobile phones in India, an Interactive Voice Response (IVR)
system with a menu option for opting in to the subsidy might be another
mechanism worth exploring.
Though its design and implementation
would require careful thought, an opt-in scheme could have a bigger
impact on the annual LPG subsidy than the current opt out scheme. At the
same time, it might be politically more acceptable than the outright
removal of subsidy for a particular economic class. Further, it would
signal a stronger intent to test and incorporate emerging evidence from
behavioural economics into policy making - a practice whose worth is
still underestimated.
(27.04.2015 - Nihit Goyal is a research
scientist at the Center for Study of Science, Technology and Policy
(CSTEP), Bengaluru. The views expressed are those of CSTEP. He can be
contacted at [email protected])