Lessons Learned from Attempts to Reform India’s Kerosene Subsidy

The paper examines the systemic failure of India's kerosene subsidy, noting that approximately 60 per cent of subsidized fuel reaches intended beneficiaries while the rest is diverted to the black market. It details failed reform attempts, including the use of GPS tracking, chemical markers, and smart cards, arguing that these partial solutions fail because the underlying price differentials create powerful incentives for corruption. The author concludes that only the liberalization of fuel prices and the removal of artificial price differentials can permanently address fuel diversion and the resulting financial losses to state-owned oil companies.

• A significant portion of subsidized kerosene is diverted to the black market for use as transport fuel, with estimates suggesting only "Approximately 60 per cent of subsidized kerosene reaches the intended beneficiaries".
• The Indian government has attempted multiple technical strategies to prevent fuel diversion, all of which failed: GPS-equipped tankers (Jan Kerosene Pariyojana) were terminated in 2008 after being found to cost more than their benefit; blue dyes and a "tamper-proof" marker from Authentix were neutralized by corrupt actors using natural clay; and smart card initiatives were rejected by state governments.
• The coupon system implemented in parts of Karnataka showed promise by reducing long lines and ensuring beneficiaries received their quotas, but it was dismantled due to lobbying by kerosene dealers and politicians.
• Subsidies for residential liquid petroleum gas (LPG) are also diverted to commercial and transport sectors due to large price differentials, though this does not deprive the poorest households as much as kerosene diversion does.
• Government-owned oil companies suffered massive financial losses due to "under-recoveries" because the government prevented them from passing international crude oil price increases to consumers. Total under-recoveries rose from US$9.03 billion in 2005–06 to US$22.45 billion in 2008–09.
• The author argues that the primary driver for maintaining these subsidies is not the welfare of the poor, but the "invisible hand of self-interest" and the collection of rents by politically connected dealers and officials.

APA

Shenoy, B. V. (2010). Lessons Learned from Attempts to Reform India’s Kerosene Subsidy. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/lessons_india_kerosene_subsidy.pdf

Chicago

Shenoy, Bhamy V. Lessons Learned from Attempts to Reform India’s Kerosene Subsidy. International Institute for Sustainable Development, 2010. https://www.iisd.org/system/files/publications/lessons_india_kerosene_subsidy.pdf.

Wikipedia

{{cite report |last1=Shenoy |first1=Bhamy V. |title=Lessons Learned from Attempts to Reform India’s Kerosene Subsidy |publisher=International Institute for Sustainable Development |date=March 2010 |url=https://www.iisd.org/system/files/publications/lessons_india_kerosene_subsidy.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{shenoy2010lessons, author = {Shenoy, Bhamy V.}, title = {{Lessons Learned from Attempts to Reform India’s Kerosene Subsidy}}, institution = {International Institute for Sustainable Development}, year = {2010}, month = mar, url = {https://www.iisd.org/system/files/publications/lessons_india_kerosene_subsidy.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }