## For Richer, Not Poorer: Energy Subsidies in India

_IMF Blog, June 24, 2013_

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**Canonical URL:** [For Richer, Not Poorer: Energy Subsidies in India](https://www.imf.org/en/blogs/articles/2013/06/24/for-richer-not-poorer-energy-subsidies-in-india)

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## Bibliographic details
- Authors: David Coady, Thomas Richardson
- Published: June 24, 2013

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### Overview of the problem
- Fuel subsidies in India are both fiscally costly and socially regressive.
- At a global level, IMF research finds fuel subsidies:
  - Crowd out high priority public spending like health, education and infrastructure.
  - Put pressure on current account deficits.
  - Distort productive investment toward energy-intensive sectors and technologies.
  - Contribute to global warming (they are the opposite of carbon taxes).
- In India, fuel subsidies were reaching the neighborhood of 2% of GDP before reform efforts.

### Distributional findings
- Across many low- and middle-income countries, the top 20% of households capture six times more in benefits from fuel subsidies than the poorest 20%.
- In India specifically:
  - The top 10% of households spends more than 20 times as much on fuel as the poorest 10%, in per capita terms.
  - If fuel products cost market prices, the top 20% of households would pay six times more for fuel, per person each month, than the poorest 20%.
  - Low-income households consume mainly kerosene; kerosene is the least regressive product to subsidize.
  - Upper income households predominantly use petrol (gasoline) and LPG; gasoline is the most regressive fuel product to subsidize.
- The bottom 40% of families could be fully compensated for the move to market prices for less than a fifth of what government now spends on fuel subsidies.

### Fiscal and macroeconomic implications
- Fuel subsidies:
  - Crowd out spending on roads, schools, and hospitals.
  - Add pressure to worsening current account deficits.
  - Encourage distortions toward energy-intensive investment and technologies.
- Reducing fuel subsidies would create fiscal space for high priority spending and help ease current account pressures.

### Policy actions taken and considerations
- Government measures over the past nine months include:
  - Systematic increases in diesel prices.
  - Plans to cap the number of subsidized Liquefied Petroleum Gas cylinders per household.
  - Encouragement for state electricity boards to set more cost-reflective power tariffs.
- These measures are described as welcome and pro-poor, because subsidy removal shifts costs toward higher-consuming richer households.
- Targeting and leakage:
  - The analysis assumes no leakage of benefits; leakage is a major challenge in India.
  - Even if half of the efficiency gain were lost to leakage, fuel subsidy reform would still create significant fiscal space.
  - The government’s plans to improve the targeting of fuel subsidies are viewed as particularly promising.

*Source: David Coady, Thomas Richardson, June 24, 2013 — For Richer, Not Poorer: Energy Subsidies in India*

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## References

- [recent IMF research](http://www.imf.org/external/np/fad/subsidies/index.htm)
- [new IMF working paper](http://www.imf.org/external/pubs/cat/longres.aspx?sk=40593.0)
- [https://www.imf.org/wp-content/uploads/2013/06/india-subsidies-chart.jpg](https://www.imf.org/wp-content/uploads/2013/06/india-subsidies-chart.jpg)

_Source: https://www.imf.org/en/blogs/articles/2013/06/24/for-richer-not-poorer-energy-subsidies-in-india_