IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v113y2022ics0140988322003450.html
   My bibliography  Save this article

Impact of India's diesel subsidy reforms and pricing policy on growth and inflation

Author

Listed:
  • Ghosh, Probal P.

Abstract

India's consumption of petroleum products depends 85% on imported crude. Diesel constituted 40–45% of consumption. The government 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. Therefore, the diesel subsidy reforms initiated in 2012 and the diesel pricing policy followed since 2014 by the government of India was expected to reduce the fiscal deficit and provide for market-based pricing which would enhance the efficiency of diesel use in the economy and therefore reduce inflation and increase growth. However, the diesel pricing policy followed by GOI deviated from market-based pricing. It 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. India's experience of the post-reform years is assessed with a VAR based macroeconomic model, estimated using 78 quarterly data from 1997-98 Q1 to 2016–17 Q2 covering the period of diesel subsidy reforms and pricing policy. The results show that diesel subsidy reforms improved growth and helped cushion India's economy against the negative impact of slow export growth and low rainfall. The analysis also shows that a market-linked diesel pricing policy would have provided more growth than the pricing policy pursued. This has lessons for other developing countries.

Suggested Citation

  • Ghosh, Probal P., 2022. "Impact of India's diesel subsidy reforms and pricing policy on growth and inflation," Energy Economics, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:eneeco:v:113:y:2022:i:c:s0140988322003450
    DOI: 10.1016/j.eneco.2022.106195
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988322003450
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2022.106195?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Breton, Michèle & Mirzapour, Hossein, 2016. "Welfare implication of reforming energy consumption subsidies," Energy Policy, Elsevier, vol. 98(C), pages 232-240.
    2. Elshennawy, Abeer, 2014. "The implications of phasing out energy subsidies in Egypt," Journal of Policy Modeling, Elsevier, vol. 36(5), pages 855-866.
    3. Li, Yingzhu & Shi, Xunpeng & Su, Bin, 2017. "Economic, social and environmental impacts of fuel subsidies: A revisit of Malaysia," Energy Policy, Elsevier, vol. 110(C), pages 51-61.
    4. M. R. Anantha Ramu & K. Gayithri, 2017. "Fiscal deficit and inflation linkages in India: tracking the transmission channels," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 19(1), pages 1-24, April.
    5. Ghosh, Sajal, 2010. "High speed diesel consumption and economic growth in India," Energy, Elsevier, vol. 35(4), pages 1794-1798.
    6. Dennis, Allen, 2016. "Household welfare implications of fossil fuel subsidy reforms in developing countries," Energy Policy, Elsevier, vol. 96(C), pages 597-606.
    7. Jain, Anil K., 2018. "A fine balance: Lessons from India's experience with petroleum subsidy reforms," Energy Policy, Elsevier, vol. 119(C), pages 242-249.
    8. Anand, Mukesh Kumar, 2012. "Diesel Pricing in India: Entangled in Policy Maze," Working Papers 12/108, National Institute of Public Finance and Policy.
    9. Acharya, Rajesh H. & Sadath, Anver C., 2017. "Implications of energy subsidy reform in India," Energy Policy, Elsevier, vol. 102(C), pages 453-462.
    10. Ramanathan, R., 1999. "Short- and long-run elasticities of gasoline demand in India: An empirical analysis using cointegration techniques," Energy Economics, Elsevier, vol. 21(4), pages 321-330, August.
    11. Saari, M. Yusof & Dietzenbacher, Erik & Los, Bart, 2016. "The impacts of petroleum price fluctuations on income distribution across ethnic groups in Malaysia," Ecological Economics, Elsevier, vol. 130(C), pages 25-36.
    12. Sajal Ghosh & Kakali Kanjilal, 2014. "Oil price shocks on Indian economy: evidence from Toda Yamamoto and Markov regime-switching VAR," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 7(1), pages 122-139, March.
    13. Gharibnavaz, Mohammad Reza & Waschik, Robert, 2015. "Food and energy subsidy reforms in Iran: A general equilibrium analysis," Journal of Policy Modeling, Elsevier, vol. 37(5), pages 726-741.
    14. Solaymani, Saeed & Kari, Fatimah, 2014. "Impacts of energy subsidy reform on the Malaysian economy and transportation sector," Energy Policy, Elsevier, vol. 70(C), pages 115-125.
    15. Mandal, Kumarjit & Bhattacharyya, Indranil & Bhoi, Binod B., 2012. "Is the oil price pass-through in India any different?," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 832-848.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aiman Albatayneh & Adel Juaidi & Francisco Manzano-Agugliaro, 2023. "The Negative Impact of Electrical Energy Subsidies on the Energy Consumption—Case Study from Jordan," Energies, MDPI, vol. 16(2), pages 1-17, January.
    2. Saeed Solaymani, 2021. "Energy subsidy reform evaluation research – reviews in Iran," Greenhouse Gases: Science and Technology, Blackwell Publishing, vol. 11(3), pages 520-538, June.
    3. Bah, Muhammad Maladoh & Saari, M. Yusof, 2020. "Quantifying the impacts of energy price reform on living expenses in Saudi Arabia," Energy Policy, Elsevier, vol. 139(C).
    4. Xu, Shang & Zhang, Jun, 2023. "The welfare impacts of removing coal subsidies in rural China," Energy Economics, Elsevier, vol. 118(C).
    5. Shittu, Ibrahim & Abdul Latiff, Abdul Rais & Baharudin, Siti ‘Aisyah, 2024. "Assessing the compensation and reinvestment plans for fuel subsidy rationalization in Nigeria: A dynamic computable general equilibrium approach," Energy, Elsevier, vol. 293(C).
    6. Timilsina, Govinda R. & Pargal, Sheoli, 2020. "Economics of energy subsidy reforms in Bangladesh," Energy Policy, Elsevier, vol. 142(C).
    7. Haqiqi, Iman & Yasharel, Sepideh, 2018. "Removing Fossil Fuel Subsidies to Help the Poor," MPRA Paper 95907, University Library of Munich, Germany.
    8. Breisinger, Clemens & Mukashov, Askar & Raouf, Mariam & Wiebelt, Manfred, 2019. "Energy subsidy reform for growth and equity in Egypt: The approach matters," Energy Policy, Elsevier, vol. 129(C), pages 661-671.
    9. Henseler, Martin & Maisonnave, Helene, 2018. "Low world oil prices: A chance to reform fuel subsidies and promote public transport? A case study for South Africa," Transportation Research Part A: Policy and Practice, Elsevier, vol. 108(C), pages 45-62.
    10. Djoni Hartono & Ahmad Komarulzaman & Tony Irawan & Anda Nugroho, 2020. "Phasing out Energy Subsidies to Improve Energy Mix: A Dead End," Energies, MDPI, vol. 13(9), pages 1-15, May.
    11. Shehabi, Manal, 2020. "Diversification effects of energy subsidy reform in oil exporters: Illustrations from Kuwait," Energy Policy, Elsevier, vol. 138(C).
    12. Bhuvandas, Dhanyashree & Gundimeda, Haripriya, 2020. "Welfare impacts of transport fuel price changes on Indian households: An application of LA-AIDS model," Energy Policy, Elsevier, vol. 144(C).
    13. Gelan, Ayele U., 2018. "Kuwait's energy subsidy reduction: Examining economic and CO2 emission effects with or without compensation," Energy Economics, Elsevier, vol. 71(C), pages 186-200.
    14. Korrakot Phomsoda & Nattapong Puttanapong & Mongkut Piantanakulchai, 2021. "Economic Impacts of Thailand’s Biofuel Subsidy Reallocation Using a Dynamic Computable General Equilibrium (CGE) Model," Energies, MDPI, vol. 14(8), pages 1-21, April.
    15. Khalid, Syed Adnan & Salman, Verda, 2020. "“Welfare impact of electricity subsidy reforms in Pakistan: A micro model study”," Energy Policy, Elsevier, vol. 137(C).
    16. H. Xavier Jara & Marcelo Varela & Po Chun Lee & Lourdes Montesdeoca, 2018. "Fuel subsidies and income redistribution in Ecuador," WIDER Working Paper Series 144, World Institute for Development Economic Research (UNU-WIDER).
    17. de Freitas, Luciano Charlita & Kaneko, Shinji, 2011. "Ethanol demand under the flex-fuel technology regime in Brazil," Energy Economics, Elsevier, vol. 33(6), pages 1146-1154.
    18. Pradeep, Siddhartha, 2022. "Impact of diesel price reforms on asymmetricity of oil price pass-through to inflation: Indian perspective," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    19. Li, Aijun & Peng, Dan & Wang, Daoping & Yao, Xin, 2017. "Comparing regional effects of climate policies to promote non-fossil fuels in China," Energy, Elsevier, vol. 141(C), pages 1998-2012.
    20. Zahra Zarepour, 2022. "Short- and long-run macroeconomic impacts of the 2010 Iranian energy subsidy reform," SN Business & Economics, Springer, vol. 2(10), pages 1-32, October.

    More about this item

    Keywords

    Energy subsidies; Energy pricing policy; Inflation; Growth; Fiscal deficits; Vector auto regression;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:113:y:2022:i:c:s0140988322003450. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.