Welfare impacts of transport fuel price changes on Indian households: An application of LA-AIDS model

This paper analyzes the direct impact of transport fuel price change on household welfare in India using a cross-sectional household consumption expenditure survey data. The results show that transport fuel is price elastic in both urban and rural areas across income groups, implying that the subsidy reform undertaken by the Government of India is an effective means to reduce the residential transport energy consumption. However, the relative welfare values show that lower- and middle-income groups remain more vulnerable to transport fuel price changes, thus, suggesting a regressive effect. Since households do not have an affordable substitution option for transport fuels like petrol and diesel, decarbonizing transport sector needs investing in alternate fuels, technology and infrastructure. However, for sustainability and inclusion to go hand-in-hand, mere switching to alternate or cleaner fuel sources is not sufficient. It is imperative to encourage the use of public transport in India, considering the increasing transport demand due to the rising middle-income population and rapid urbanization. Along with it, the policy makers could consider offsetting the subsidy removal by a targeted compensation scheme which will not just ensure making the transition more inclusive, but also serve as a long term sustainable development strategy.