The large subsidy on diesel has become controversial in view of the large current account and fiscal deficits. The consequent depreciation of the rupee—along with the additional fiscal burden of the food security bill—will make it absolutely necessary to phase out the diesel subsidy of about Rs 13 per litre. Our research shows that doing so over the next one year will reduce current account deficit by $8 billion
and the fiscal deficit by about $15 billion in every subsequent year. The possible immediate spurt in inflation can be avoided by increasing diesel price gradually by about Rs 1 per month.
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Institute of Economic Growth, University Enclave, University of Delhi (North Campus),
Delhi 110 007, India