Fixed LPG subsidy sparks hopes of lower losses

Subsidised consumption accounted for 73% of the total LPG usage last financial year

The government’s decision to fix domestic cooking gas subsidies could drive down Indian oil marketing companies’ total revenue loss on subsidised LPG sales by over 8 per cent to Rs 42,700 crore in the current financial year.

Subsidised consumption accounted for 73 per cent of the total LPG usage last financial year. The three oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — sold subsidised LPG at an average price of Rs 440.39 a cylinder. Total under-recoveries on LPG stood at Rs 46,458 crore — 33 per cent of gross under-recoveries of Rs 1,39,000 crore.

Assuming that the subsidies are capped at the current level of Rs 404.64 a cylinder, total losses on subsidised sales would come down by Rs 3,716 crore for the oil marketing companies. However, the figure for LPG under-recoveries would rise by a marginal one per cent over last year’s Rs 46,458 crore if the subsidy is capped at Rs 444.85 a cylinder, the average subsidy observed in the current financial year so far.

The Union cabinet had, on Monday, announced a re-launch of the Direct Benefit Transfer scheme for LPG distribution as part of fuel reforms.

“Under the modified DBTL scheme, the subsidy a domestic subsidised cylinder will be fixed,” an official statement had said. Petroleum Minister Dharmendra Pradhan told the Business Standard that a new system fixing the subsidy would be designed after a discussion between the department of expenditure and his ministry. Currently, consumers pay less than half the market price till for a maximum of 12 subsidised cylinders in a year.

“The cap of cylinders will be the same but the deliverable price will change. Till now, the price was same but the subsidy used to change,” he said.

Unlike the system put in place by the UPA government, where consumers were allowed 12 subsidised cylinders without any limit on how much loss would be borne by the oil marketing companies, the new system would entail a periodic revision in the price of the subsidised LPG cylinders so that the subsidy remained fixed. Consumers till now were paying the market price for any consumption beyond 12.

India’s total LPG consumption has grown from 14,331 tonnes in 2010-11 to 16,336 tonnes last financial year. The share of subsidised consumption grew marginally from 86 per cent in 2010-11 to 87 per cent in 2011-12 before declining to 80 per cent in 2012-13 and further to 73 per cent in 2013-14. Total LPG consumption has jumped 11 per cent to 8,562 tonne between April and September current year from 7,737 tonne in the same period last year.

According to rating agency Moody’s, rising commodity prices actually have led to a significant increase in the subsidy outlay. The petroleum subsidy bill grew nearly six-fold over the last five years to Rs 85,500 crore in 2013-14 from Rs 15,000 crore in 2009-10. The government has implemented multiple reforms to the fuel subsidy program, including allowing oil marketing companies to increase diesel prices incrementally, withdrawing the subsidy on diesel sold in bulk and limiting subsidised consumption of LPG since 2012.