The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India
IMF Working Papers, May 29, 2013
Source details
- Canonical URL
- The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India
Other formats
Bibliographic details
- Authors: Rahul Anand, David Coady, Adil Mohommad, Vimal V Thakoor, James P Walsh
- Published: May 29, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484305164.001
Summary
- Rising fuel subsidies have contributed to fiscal pressures in India.
- The paper evaluates the fiscal and welfare implications of fuel subsidy reform in India.
- Fuel subsidies are found to be badly targeted, with the richest ten percent of households receiving seven times more in benefits than the poorest ten percent.
- Although subsidy reform would generate substantial fiscal savings, the associated increases in fuel and other prices would lower household real incomes of all income groups.
- Better targeting of fuel subsidies would fully protect lower income households while still generating substantial net fiscal savings.
- Lessons from subsidy reforms in other countries are identified and discussed.
Key Findings
- Targeting failure: The richest ten percent of households receive seven times more in benefits than the poorest ten percent.
- Distributional impact: Increases in fuel and other prices from subsidy reform would lower household real incomes across all income groups.
- Fiscal impact: Subsidy reform would generate substantial fiscal savings.
- Policy trade-off: Reforms that remove subsidies improve fiscal balances but impose welfare costs unless compensatory measures are implemented.
Policy Recommendations and Lessons
- Better targeting of fuel subsidies:
- Fully protect lower income households while still generating substantial net fiscal savings.
- Compensating transfers:
- Use targeted transfers to offset adverse welfare impacts on poor households resulting from higher fuel and other prices.
- Draw on international experience:
- Identify and discuss lessons from subsidy reforms in other countries to guide India's reform strategy.
Subject Areas and Keywords
- Subject: Energy subsidies, Expenditure, Fuel prices, Inflation, National accounts, Personal income, Price adjustments, Prices
- Keywords: compensating transfers, distributional impact, Energy subsidies, Fuel prices, Fuel pricing, fuel subsidy, Global, India, Inflation, kerosene price subsidy, liberalization program, LPG subsidy, Personal income, Price adjustments, price liberalization, refining company, reform plan, subsidy reform, transfer program, unsubsidized kerosene price, WP
Source: IMF Working Papers — "The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India" (Working Paper No. 2013/128), May 29, 2013.