Impact of gasoline and diesel subsidy reforms: India case study

May 2016 | Arjun Chopra and Agnieszka Kloskowska


Since 2014, falling crude oil prices have triggered gasoline and diesel subsidy cuts in a number of countries. Developing countries in Asia have taken advantage of lower international market prices to move regulated domestic markets for gasoline, diesel and other petroleum products closer to free market pricing.

India completely removed subsidies for diesel by deregulating domestic retail diesel prices and allowing them to link to international prices. Indonesia deregulated gasoline prices but capped diesel subsidies. Malaysia deregulated both gasoline and diesel prices.

Low crude prices have led to fuel subsidy reductions

A number of crude exporting countries have also reduced fuel subsidies in order to make up for the fall in their crude oil export revenues since 2014. The UAE completely removed gasoline subsidies by increasing retail prices to international levels. Saudi Arabia, Qatar, Bahrain and Oman increased retail gasoline prices between 30 and 60%. Oman also allowed diesel prices to rise. Venezuela recently announced an increase in retail gasoline prices for the first time in 20 years by almost 60 times (see Exhibit 1).

Exhibit 1


These policy changes, coupled with falling international price benchmarks for gasoline and diesel, have resulted in a significant drop in the global pre-tax consumer subsidy. For both gasoline and diesel, the difference between the price paid by consumers and the price they would pay based on spot prices in the hub market has fallen by almost 56% from 2013 to 2015 (see Exhibit 2).

Exhibit 2


India provides a good case study for the potential impact of this deregulation with two key learnings emerging: lifting of the subsidies does not have to cause a decline in demand if carried out gradually, and, depending on the regulatory setup, there may be market players who can benefit from the change.

Fuel subsidy reform in India has not resulted in demand decline

India was the first country in Asia to eliminate fuel price subsidies. At the end of 2014, the government fully deregulated diesel prices. This was the completion of a longer-term strategy to gradually increase diesel prices that was launched before the fall in crude prices. The government began raising diesel prices by approximately 1% or INR 0.5/liter each month since January 2013. The falling international diesel price as a result of low crude prices allowed prices to link with international prices in October 2014 (see Exhibit 3).

Exhibit 3


This price liberalization does not appear to have affected the country’s diesel demand. Demand has generally remained firm, with the possible exception of a few months in the summer of 2013 and in early 2014. A number of factors contributed to this. India has enjoyed strong economic growth, which ensured favorable fundamental demand. Also, the country’s government’s approach to gradually increase the prices prevented a major demand destruction effect. (See Exhibit 4)

Exhibit 4


Subsidy reforms have affected suppliers

The fall in international prices and gradual increase in retail prices carried out since 2013 reduced overall diesel subsidies in India from USD 11 billion in 2013 to USD 2 billion in 2014. These reforms have reduced the burden of petroleum subsidies, which have mainly been born by Indian NOCs and the central government (see Exhibit 5).

Privately owned refining companies have also welcomed this reform and have reopened approximately 3,000 fuel retail outlets shut down after the Indian government started regulating gasoline and diesel prices in 2006. They are also planning to expand their networks by opening 5,000 new outlets throughout the country. This move by the private companies is likely to increase competition with their NOC peers who currently own approximately 95% of the total 50,000 fuel retail outlets in the country.

The fall in international prices and gradual increase in retail prices carried out since 2013 reduced overall diesel subsidies in India from USD 11 billion in 2013 to USD 2 billion in 2014. These reforms have reduced the burden of petroleum subsidies, which have mainly been born by Indian NOCs and the central government (see Exhibit 5).

Exhibit 5


Privately owned refining companies have also welcomed this reform and have reopened approximately 3,000 fuel retail outlets shut down after the Indian government started regulating gasoline and diesel prices in 2006. They are also planning to expand their networks by opening 5,000 new outlets throughout the country. This move by the private companies is likely to increase competition with their NOC peers who currently own approximately 95% of the total 50,000 fuel retail outlets in the country.

Implications of the gasoline and diesel subsidy removal

The fuel subsidy removal story in India presents some potential implications for various market participants, which in some cases may also be applicable to other countries:

  • Governments/policy makers – Lowering petroleum subsidies generally reduces the burden on fiscal budgets and allows governments to focus more on overall economic development by reallocating their budgets to other economic needs. Lowering subsidies gradually may mitigate the negative impact on demand
  • Fuel marketing and retail companies – In cases where fuel prices are regulated and subsidies are disproportionately borne by only some fuel retailers with reduced activity by other players, the fuel retail sector may become more competitive post price deregulation. This is likely to shift emphasis to operational efficiences and innovative marketing strategies in order to gain or retain a competitive advantage
  • Refiners – Subsidy removals, while not necessarily reducing demand, may still lead to a slowdown in demand growth in countries where they are executed, in particular in the Middle East and Asia where the reforms have been concentrated. Refiners in those regions may need to increase their efforts to achieve operational efficiency to maintain utilization rates and profitability.
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About the authors

Agnieszka Kloskowska is a specialist with Energy Insights in McKinsey's London office and Arjun Chopra is a research analyst with McKinsey’s Oil and Gas Practice in Gurgaon.