Evaluating India’s Diesel Subsidy Reforms and Domestic Diesel Pricing Policy—What It Achieved and What It Could Have Achieved

The government of India till 2014 controlled the retail price of diesel and the burden of subsidies was borne by the public sector oil companies and the government. While low retail diesel price lowered the cost of distribution of goods, it increased the government fiscal deficit. The diesel subsidy reforms initiated in 2012 and the diesel pricing policy followed since 2014 by the government of India improved the fiscal position of the government and the resources of the OMCs but economic growth during the post reforms period did not improve as was expected. Three major interventions affected the economy during the post diesel reforms era (1) Diesel subsidy reforms (2) Domestic diesel pricing policy and (3) changing macroeconomic factors. This paper quantifies the individual contribution of each of the three interventions and illustrates the optimality of the diesel subsidy reforms policy. The results show that diesel price reforms and the domestic diesel pricing policy helped in cushioning the economy from adverse macroeconomic factors. The gains could have been further if the macroeconomic situation was as favourable as in the pre reforms period and the government had adopted a market-linked pricing policy for diesel (This chapter draws on an earlier paper by the author titled “Impact of India’s diesel subsidy reforms and pricing policy on growth and inflation” with permission. See (Ghosh in Energy Economics, 113:106195, 2010.)).