Posted

May 30, 2013 11:16:50 AM

Date

2013-05

Author

Rahul Anand, David Coady, Adil Mohommad, Vimal Thakoor, and James P. Walsh

Affiliation

Asia and Pacific Department, IMF

Title

The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India

Summary /
Abstract

Rising fuel subsidies have contributed to fiscal pressures in India. A key policy concern regarding subsidy reform is the adverse welfare impact on households, in particular poor households. This 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.

Keywords

Fuel pricing, subsidy reform, distributional impact, compensating transfers, India

URL

http://www.imf.org/external/pubs/ft/wp/2013/wp13128.pdf

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