Effect of Reduction of Fuel Subsidies on Poverty and Inequality in Developing Countries - The Case of India

We use the Computable General Equilibrium (CGE) framework to show that there is a positive relationship between crude prices and the extent of poverty and inequality in India. We further show that any removal of subsidies on fuels such as petrol, diesel and Liquid Petroleum Gas (LPG), even when it is done during periods of declining crude prices, is antipoor. Importantly however when removal of these subsidies are coupled with targeted pro-poor transfers (as proposed, for instance, in the next phase of the Direct Benefit Transfer of LPG (DBTL) scheme in India) results in improvement of inequality and poverty indicators and thus mitigates the negative effects of removal of subsidy.