Subsidy probably works best only when the beneficiaries are limited in number. Take for example the cooking gas. This subsidy worked well until the decade of nineties. Since the nineteen nineties, the number of families that have got added to the middle class every year, is in millions. This has meant that we need to provide for many more families' subsidy. The problem turned more acute in the 2000s, when the economic growth rate moved up to 9%, propelling larger number of families into the middle and lower middle class section every year.
Therefore now we are moving to a situation nationally that we find it very hard to maintain these subsidies for all users. The solution then is to limit the beneficiaries to a smaller number. This can be done by reserving the subsidies for only those who need it the most i.e. those who find it hard to afford the full cost, and the subsidized cost is something that they can live with. Giving them these subsidies also saves precious firewood.
The same is now true for subsidy on diesel. We have reached a situation where this has become untenable. Who should the diesel subsidy benefit? In my view these should benefit the poor villages of India that barely have roads leading up to them. Even the basic necessities of life such as salt and soap cost lot more because transport costs, and costs heavily in the more interior parts. They need the subsidy. However everyone seems to be having a party on freebies given by the diesel subsidy. The rich and the aspiring rich in the small towns (also in many villages, but we can ignore them until they become a large number) and cities drive SUVs, maintain successful fleets for their businesses -- all at the expense of taxpayer. This has to stop. The diesel subsidy too was fine a few decades back when the beneficiaries were limited. That has changed now.
In all, we forgot to review our subsidies as the pool of beneficiaries grew larger. This is also at the heart of our fiscal miseries.