A fine balance: Lessons from India's experience with petroleum subsidy reforms

Highlights: • Recent reforms in India have virtually eliminated petroleum subsidies. • Calibrated use of three policy levers – petroleum taxation, retail prices and subsidy. • Balance achieved between fiscal, commercial and consumer interests. • Case-study for developing countries desirous to migrate to market pricing in phases. • Reforms still work-in-progress as full pricing freedom not yet granted. - Abstract: India's energy sector is passing through a significant transformation, triggered by recent international developments in global oil prices. Historically, diesel, kerosene and Liquefied Petroleum Gas (LPG) have been subsidised leaving a small net balance from petroleum taxes for the government, and poor financials for the oil companies. However, all this changed when crude prices declined from over $100/barrel in June 2014 to $50/barrel in June 2017. Concurrent reforms undertaken by the government have radically reduced subsidies from $24.6 billion in 2013 to just $1.16 billion in 2017. This paper shows how reforms involved the strategic application of three different policy 'levers' – retail prices, tax rates and subsidies – with beneficial outcomes for the three main stakeholders – oil companies, the government, and the poorest consumers – the latter through keeping subsidies intact for LPG and kerosene which are used by the poor. It examines policy interventions by the Indian government across these different levers at different points of time. The analysis reveals that petroleum subsidy reform involves much more than simply raising retail prices. The paper brings out policy recommendations from the Indian experience for countries that wish to implement structural reforms in pricing, taxation and subsidies.