DELHI - 14 September 2012 – The Government of India today announced a 14% increase in the diesel price and new quotas for subsidized LPG cylinders in a bid to reduce its mounting fuel subsidy budget.

The reforms are intended to shore up India’s weakening fiscal position. With a rising fiscal deficit, India was at risk of becoming the first of the BRICS countries to have its credit rating downgraded to ‘junk.’ Last month oil-marketing companies reported record losses, claiming they were “living off borrowed money” in order sell petroleum products at the low, government-controlled rates. A dry monsoon season has added to the challenging economic climate, contributing to high food prices and high inflation.

The reforms will see the following changes take place:

• Diesel prices: increased by INR 5 per litre, a 14% increase. This is the first diesel price adjustment in 15 months. Prior to the increase, oil marketing companies were losing between INR 10-15 per litre.
   
• LPG cylinders: a new quota introduced to limit the purchase of subsidized 14.2 kg LPG cylinders to 6 per consumer per year. Previously there were no limits on the number of subsidized LPG cylinders consumers could buy for domestic use.

While these policies will go some way towards reducing India’s fuel subsidies, deeper reforms are needed to remove the subsidies entirely. The IISD, in collaboration with the Delhi-based National Institute for Public Finance and Policy (NIPFP) and The Energy and Resources Institute (TERI), have published a policy brief that provides short- and long-term recommendations for gradually phasing out subsidies for diesel, LPG and kerosene while providing more effective, targeted support for those that need it. The short-term recommendations include the reforms that have now taken place: a gradual increase in diesel prices and restricting the purchase of subsidized LPG cylinders per household.

The series of reports also provide in-depth analysis of the economic impacts of increasing diesel prices for sensitive sectors such as transport and agriculture, and outline how a cash transfer scheme should be designed to support the reform of fuel subsidies, in particular kerosene.

For more information and the full reports, see: http://www.iisd.org/gsi/fuel-subsidies-india