Phasing out energy subsidies

India’s energy subsidies are large by any standard and impose enormous fiscal costs on the central government and, in turn, on Indian taxpayers. They also entail economic and environmental costs and primarily benefit wealthier households. Phasing out energy subsidies and allowing greater latitude for price signals to operate in energy markets would increase economic efficiency and reduce greenhouse gas emissions over the long run. A number of steps have been taken recently in this direction, including a change in gasoline pricing, as well as efforts aiming at moving away from the current system of subsidies on kerosene and liquid petroleum gas towards direct help in cash for people with incomes below the poverty line. Higher world oil prices have overwhelmed these efforts, however. Targeted cash transfers would help shield low-income households from increases in energy prices though they will be difficult to implement effectively.