India’s Fuel Subsidies: Policy recommendations for reform

The document argues that India's fuel subsidies are fiscally unsustainable and create market distortions. It proposes a phased roadmap to eliminate diesel under-recoveries, phase out LPG subsidies through capping and price increases, and replace PDS kerosene subsidies with targeted cash transfers. To manage the resulting inflationary pressures and political opposition, the brief suggests specific compensation measures for transport sectors and the implementation of a biometric-based cash transfer system for low-income households.

• India's fuel subsidy expenditure is fiscally unsustainable; in fiscal year 2010–2011, the government spent INR 43,904 crore (US$9.6 billion) on retail price subsidies for diesel, kerosene, LPG, and gasoline, while oil companies faced under-recoveries of INR 37,190 crore (US$8.2 billion).
• The document recommends a phased approach to eliminate diesel under-recovery over approximately one year, suggesting monthly price increases of around INR 1 per litre or adjustments based on international prices and inflation.
• To reform LPG subsidies, the brief suggests an immediate small price increase followed by a medium-term cap of eight cylinders per household per year by 2013, which could generate annual savings of INR 4,089 crore (US$900 million).
• PDS kerosene subsidies are plagued by illegal diversion and adulteration; an estimated 18 per cent of PDS kerosene is diverted for non-household use, with some estimates suggesting diversions worth up to INR 28,000 crore (US$6.15 billion) per year.
• The brief proposes replacing PDS kerosene subsidies with an unconditional, targeted cash transfer scheme for below-poverty-line (BPL) households, suggesting that redistributing 80 per cent of kerosene subsidies could provide roughly INR 200 per month per BPL household.
• The inflationary impact of removing diesel subsidies is estimated to be relatively low at a macro level, with one first-order estimate suggesting a 10 per cent increase in diesel price would lead to a 0.47 per cent increase in the general price level.
• Specific sectors would be disproportionately affected by diesel price hikes; a 25 per cent increase in diesel prices is estimated to increase costs for road goods/freight transporters by 10% and large public road transport operators by 8%.
• To mitigate the impacts of reform, the document suggests direct fiscal transfers to state road transport corporations (SRTCs) and the use of biometric data via the Unique Identification Authority of India (UIDAI) for delivering cash transfers.

APA

Lang, K., & Wooders, P. (2012). India’s Fuel Subsidies: Policy recommendations for reform. International Institute for Sustainable Development. https://www.iisd.org/gsi/sites/default/files/ffs_india_guide_rev.pdf

Chicago

Lang, Kerryn, and Peter Wooders. India’s Fuel Subsidies: Policy recommendations for reform. International Institute for Sustainable Development, 2012. https://www.iisd.org/gsi/sites/default/files/ffs_india_guide_rev.pdf.

Wikipedia

{{cite report |last1=Lang |first1=Kerryn |last2=Wooders |first2=Peter |title=India’s Fuel Subsidies: Policy recommendations for reform |publisher=International Institute for Sustainable Development |date=August 2012 |url=https://www.iisd.org/gsi/sites/default/files/ffs_india_guide_rev.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{lang2012indias, author = {Lang, Kerryn and Wooders, Peter}, title = {{India’s Fuel Subsidies: Policy recommendations for reform}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = aug, url = {https://www.iisd.org/gsi/sites/default/files/ffs_india_guide_rev.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }