India’s fuel subsidies: policy recommendations for reform

This policy brief summarizes two research papers on fossil-fuel subsidy reform in India and highlights the key policy recommendations. The Government of India spent over US$ 9 billion subsidizing fuel products – diesel, kerosene, LPG and, to a lesser extent, gasoline – in 2010-11. The Government’s total subsidy expenditure (including for food and fertilizer) increased by nearly 27% in 2011-12, significantly contributing to the deterioration of India’s fiscal balance. In addition, national oil companies incurred over US$ 8 billion worth of under-recoveries. The Government has announced its goal of reducing total subsidy expenditure to 2% of GDP in 2012-13, with further reductions down to 1.75% in following years. Yet reform has been hampered by legitimate concerns over how higher fuel prices will affect the broader economy—potentially disrupting key sectors like transport, industry and agriculture—and the ability of poor citizens to cope with higher prices.