Lessons Learned from Attempts to Reform India’s Kerosene Subsidy

Abstract

The Global Subsidies Initiative (GSI) has commissioned case studies of fossil-fuel subsidy reform in Brazil, France, Ghana, India, Indonesia, Poland and Senegal. In Lessons Learned from Attempts to Reform India's Kerosene Subsidy Dr. Bhamy V. Shenoy examines India's attempts to reform its long-standing subsidy on residential kerosene. The report explains the roots of India’s fossil-fuel subsidies, reviews the rationale for their reform and analyses why India’s previous attempts at reform have not worked. It draws lessons from this experience for the future. Among its key findings are: 1) Kerosene subsidies are ineffective at helping the poor: at most, two thirds of India’s subsidized kerosene goes to low-income households, the rest diverted onto black markets. 2) Once introduced, subsidies become a ‘sacred cow’. Politicians continue to support them in the name of helping the poor, but the real reason is to collect the huge rents that are created by diverting kerosene for adulteration. The black market profits help elect corrupt leaders, affecting governance as well as energy security. 3) India has tried and failed to reform its subsidies, because its solutions haven’t targeted the real problem – a lot of money can be made from reduced price kerosene. The Indian public needs to become aware how much of their money is being wasted. Only then will there be enough support for subsidy reform. The GSI is now one year into a three-year program of work on fossil-fuel subsidies. The first set of outputs are soon to be collected in one volume under the title, Untold Billions: Fossil-fuel subsidies, their impacts and the path to reform. Support for one of the papers, Gaining traction: the importance of transparency in accelerating the reform of fossil-fuel subsidies, was generously provided by the United Nations Environment Program (UNEP).