The economic and social impact of reduction in petroleum subsidies in India will be much lower than perceived if a cash transfer system for directly subsidising vulnerable consumers is successfully implemented, studies commissioned by the Geneva-based International Institute for Sustainable Development have said.
The government must, however, dismantle subsidies in a calibrated manner as vulnerable consumers will be able to adjust better if the under-recoveries are gradually eliminated, cautioned IISD in a note that summarised two separate studies by the National Institute for Public Finance and Policy (NIPFP) and The Energy and Resources Institute.
Diesel prices may be allowed to increase by an average of 1 per litre over one or two steps per month, recommends IISD in the report India’s Fuel Subsidies: Policy Recommendations for Reform. The NIPFP Study –
"The government may wish to retain flexibility to increase prices more when inflation is seasonally low and ensure that key consumer goods and staples are available at these times," IISD has recommended.
Businesses that will struggle with higher diesel prices in the short-term may be given direct compensation.
These include public transport companies, which may have little or no control over increasing fares or reducing input costs. The research papers also supported reform of subsidies to LPG that are of greatest benefit to upper-income urban households.