Based on a recent group discussion, the STTI Chapter at Purdue explored the issue of fuel subsidies in India, and its long-term systemic consequences.
Energy subsidies have wide-ranging economic consequences. While aimed at protecting consumers, subsidies aggravate fiscal imbalances, crowd-out priority public spending, and depress private investment, including in the energy sector. Subsidies also distort resource allocation by encouraging excessive energy consumption, artificially promoting capital-intensive industries, reducing incentives for investment in renewable energy, and accelerating the depletion of natural resources. Most subsidy benefits are captured by higher-income households, reinforcing inequality. Even future generations are affected through the damaging effects of increased energy consumption on global warming.
Excerpt from Energy Subsidy Reform: Lessons and Implications, IMF, January 28th 2013.