In the name of the poor

A new IMF study reignites the debate over actual welfare effects of fuel subsides for poor, but will the NDA govt bite the bullet?

Revisiting the age old debate on fuel subsidies, ostensibly for the poor but which often end up flowing to the middle class and rich, is a new study by economists at the International Monetary Fund (IMF). The $10 billion dollar question – which is what these subsidies cost annually -- is: will political considerations override sound economic policy yet again?

 

The new IMF study estimates the welfare implications of fuel subsidy reform for households in India. According to the authors, eliminating fuel subsidies would, on average, decrease real incomes of households by 4.4%, with three-quarters of this - 3.4% of the whole - in the form of higher fuel prices and the rest in the form of indirect effects. While the welfare effects are similar for households in percentage terms, substantial differences exist in terms of what these benefits add up to in absolute subsidies per capita. The authors estimate that the average per capita welfare effects for those in the bottom two income deciles is roughly Rs 20 per month, while it works out to as much as Rs 120 per capita a month for the top 20% income-earners.

 

With various other studies also pointing out that the poor actually end up receiving a small portion of total fuel subsidies, reforming the current subsidy regime should be a top priority for the government. However with little progress being made on the issue of LPG and kerosene subsidies, will this study be just another one in a long list of those which have seen sidelined due to political compulsions?

 

With a new government at the centre, one with the strongest mandate in decades, one hopes that this time will indeed be different. However, given the disappointing lack of reformist initiatives by the government so far, whether the NDA will embark on the issue of subsidy reform once growth picks up remains a matter of conjecture. Don’t bet on it