The Government of India spent over US$ 9 billion subsidizing fuel products - diesel, kerosene, LPG and, to a lesser extent, gasoline - in 2010-11. The Government's total subsidy expenditure (including for food and fertilizer) increased by nearly 27% in 2011-12, significantly contributing to the deterioration of India's fiscal balance. In addition, national oil companies incurred over US$ 8 billion worth of under-recoveries.

This report revisits and reviews the existing mechanism of subsidy delivery through public distribution systems (PDSs) and examines the possibility of using cash transfers as an option for fossil-fuel subsidy reform. In an era of rapid technological change, it would be worthwhile to explore new technology-aided options not just to improve the mechanism of subsidy delivery, but, primarily, to ensure that the subsidies reach the intended beneficiaries. Such measures would also minimize inefficient and illegal usage of subsidized fuels. The report draws on relevant existing literature and insights from international experiences in the implementation of cash transfers. The report focuses specifically on kerosene distributed through the PDS and LPG used by households (termed as “domestic LPG”) since these are the two fuels for which cash transfers are being considered most strongly as an option for subsidy delivery.