ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Fiscal and Welfare Effects of Fuel Subsidy Reform in India

Rising fuel subsidies have contributed to fiscal pressures in India and complicated fiscal planning. A key policy concern regarding subsidy reform is the adverse welfare effect on households, in particular lower-income households. This paper discusses the magnitude and evolution of the fiscal cost of fuel subsidies and the welfare implications of fuel subsidy reform for households. Fuel subsidies are found to be badly targeted, with the richest 10% of households receiving six times more in benefits than the poorest 10%. Reallocation of budgetary savings to better targeted social programmes could fully protect lower-income households from subsidy reform while still generating substantial net fiscal savings.

The authors are grateful to Laura Papi for comments on earlier drafts and to Michael Dalesio and Ryan Espiritu for excellent research assistance. The views expressed in this paper represent those of the authors and should not be attributed to the International Monetary Fund, its executive board, or its management.

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