How govt saved over Rs 20,000 cr by silently applying brakes on LPG subsidy

While there was no need for subsidy in the low-oil-price phase of 2020, LPG prices have zoomed in 2021. But the Centre has not transferred subsidy at any point this year

On September 1, 2021, cooking gas in India became dearer by Rs 25 to take its price tag to Rs 885 per 14.2 kg cylinder in the national capital. LPG price in the country has risen by more than Rs 300 since May 2020. 

Rising crude oil prices have definitely been the reason for this. Brent crude futures have risen from their May 2020-low of $21.44 per barrel to $72.7 per barrel at the end of August 2021, according to Bloomberg. 

To save Indian households from spikes like these, the Government of India has been subsiding cooking gas for consumers, in a bid to negate the volatility, and keep prices steady for them.

But since May 2020, the 290 million LPG-using homes in the country have not been receiving consumer subsidy on purchasing LPG. There has been no official intimation on its discontinuation, but there has been no deposit of subsidy either. 

This pause in subsidies must have certainly saved a lot of money for the government. But how much? 

According to a Business Standard analysis, the government may have saved close to Rs 27,000 crore since the pandemic began, by not giving LPG subsidies.

For this analysis, the price of a subsidised cylinder has been assumed at the level it was last observed, which was close to Rs 600 (April and May 2020). At the current market price of Rs 885, an average consumer could have received a subsidy of Rs 285 per refill/purchase. 

Further, India consumes close to 145 million LPG cylinders in a month, or in other words, an average consumer household requires one cylinder every two months. 

Using monthly data provided by rating agency Crisil, and data laid down in the Parliament of India, the Business Standard analysis shows that the monthly savings add up to Rs 27,255 crore if we assume a constant price of Rs 600 for a subsidised cylinder. 

Even if we assume it to be Rs 650 per cylinder, the subsidy savings run into more than Rs 20,000 crore. 

To be fair, the fact that the government will spend less on LPG subsidies was known. The Union Budget of 2021-22 puts the projected LPG subsidy outgo for the current financial year at Rs 14,073 crore, way less than the provisional amount of Rs 36,178 crore spent in 2020-21. 

LPG subsidy—now and then

In April 2014, the government paid Rs 567 as subsidy on one LPG cylinder. Oil prices began falling months after a new government led by the Bharatiya Janata Party came to power. The subsidy component went below Rs 100 per cylinder in 2016, owing to low oil prices. 

Subsidy payout rose again in 2018, when oil prices showed signs of hardening. In November that year, the government of India paid Rs 434 as subsidy on a cylinder that was priced at Rs 941, effectively costing the consumer Rs 506 per refill.  

Oil prices hardened just before the pandemic set it. In March 2020, the subsidy per cylinder was Rs 231. The market price was Rs 806, and the consumer paid Rs 575 for a subsidised cylinder. 

As oil crashed with the news and spread of the pandemic, the notified market price remained close to Rs 600 till November 2020 (to be precise, Rs 594). There was thus, no need to subsidise as this market price was close to the effective price a consumer paid on a subsidised cylinder. 

But prices have been rising December 2020, and have reached Rs 885 in Delhi in September 2021. Last time when an LPG cylinder cost this much, the government had paid more than Rs 377 per consumer per refill. 

While the government seems to have got its way by pausing the subsidy—and saved a lot by doing so—it remains to be seen whether the government lifts the pause or discontinues the subsidy totally. 

In its initial years, the LPG subsidy programme consisted of two parts. Consumer benefit was the smaller part, close to Rs 22 per refill, while most of the subsidy was given to LPG marketing companies, as under-recovery payouts to offset the losses they incurred by selling LPG at a price lower than its cost price. The latter part was based on market prices. 

Even in 2005-06, 16 years back in time, the Centre spent close to Rs 12,000 crore a year on LPG subsidies. Over time, subsidies rose when LPG prices rose on the backdrop of rising crude oil prices. 

On January 1, 2014, one LPG cylinder in India was priced at Rs 1,241 in Delhi--probably the highest ever. At that point in time, the average consumer got a subsidised cylinder at close to Rs 420. The subsidy component was as massive as Rs 800 per cylinder. Those were the last few months of the erstwhile Indian National Congress-led regime in power in Delhi.