Implications of energy subsidy reform in India

This paper analyses welfare impact of energy subsidy reform in India based on the data from 1970‐ 71 to 2014‐ 15. To this end, Auto Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) have been estimated to quantify the short-run and long-run price and the income elasticity of v...

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Bibliographic Details
Published in:Energy policy 2017-03, Vol.102, p.453-462
Main Authors: Acharya, Rajesh H., Sadath, Anver C.
Format: Article
Language:English
Subjects:
Auto Regressive Distributed Lag (ARDL) Model
Elasticity
Elasticity of demand
Energy
Energy consumption
Energy expenditure
Energy policy
Energy subsidy
Erosion mechanisms
Error correction
Error Correction Model (ECM)
Extracellular matrix
Fossil fuels
Impact analysis
Income
India
Price elasticity
Prices
Reforms
Regression analysis
Socioeconomic factors
Studies
Subsidies
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Summary:This paper analyses welfare impact of energy subsidy reform in India based on the data from 1970‐ 71 to 2014‐ 15. To this end, Auto Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) have been estimated to quantify the short-run and long-run price and the income elasticity of various energy products. The results show that the price elasticity of demand for all fossil fuels is low, but the respective income elasticity is higher. Therefore, an increase in the general price level caused by the subsidy reform will lead to the erosion of real income and will have related welfare implications in India. The results also reveal that energy expenditure will obviously increase and hence energy consumption will decline depending upon the extent of the withdrawal of subsidy. Therefore, policy makers in India, while undertaking further reforms, must ensure that the subsidy reaches to those who truly deserve, so that the socioeconomic casualty of reforms can be minimized along with achieving fiscal goals. •We investigate the implications of energy subsidy reform on price and consumption.•Energy demand has low price elasticity and high income elasticity in India.•Level of international energy prices decide the impact of subsidy removal in the domestic market.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2016.12.036