Rising fuel subsidies have contributed to fiscal pressures in India and complicated fiscal planning. A key policy concern regarding subsidy reform is the adverse welfare effect on households, in particular lower-income households. This paper discusses the magnitude and evolution of the fiscal cost of fuel subsidies and the welfare implications of fuel subsidy reform for households. Fuel subsidies are found to be badly targeted, with the richest 10% of households receiving six times more in benefits than the poorest 10%. Reallocation of budgetary savings to better targeted social programmes could fully protect lower-income households from subsidy reform while still generating substantial net fiscal savings.
