Kerosene and LPG price hikes: A small step but a big leap forward

Increase in kerosene prices is likely to save Rs 2,000 cr for the govt in subsidy during the current financial year, while the savings on LPG subsidy may be just about Rs 25 cr

The government’s move to go in for small monthly increases in kerosene and liquefied petroleum gas (LPG) prices is not likely to yield much in terms of subsidy saving, but will set the stage for future movement towards market pricing.

The increase in kerosene prices is likely to save Rs 2,000 crore for the government in subsidy during the current financial year, while the savings on LPG subsidy may be just about Rs 25 crore.

Subsidised cooking gas prices were also increased by Rs 1.98 a cylinder and Rs 1.93 a cylinder in July and August 2016. The oil marketing companies (OMCs) sell 150 million subsidised cylinder in a year. Assuming that 12.5 million are sold every month, an increase of about Rs 2 would fetch Rs 2.5 crore. Ten hikes would yield Rs 25 crore saving. It is, however, still not clear whether the hike in LPG would be for 10 months in all since the government has not come out with an official announcement.

“A decrease of 25 paise per month on kerosene subsidy for 10 months would help the government save Rs 2,000 crore on subsidy burden,” said Dhaval Joshi, research analyst at Emkay Global Financial Services. The total amount of under-recovery incurred on sale of kerosene during 2015-16 was Rs 11,496 crore, a drop of 53 per cent from Rs 24,804 crore in 2014-15.

In July 2016, kerosene prices increased by 25 paise for the first time in five years. The second dose of price increase was on August 1 and the rate hike will continue every month till April 2017.

Diesel price was deregulated in November 2014 in a similar way by the Manmohan Singh-led United Progressive Alliance government through 50 paise hikes every month to eliminate subsidies. The near Rs 2 hike in LPG is also aimed at doing so. However, the Dharmendra Pradhan-led petroleum ministry has not yet confirmed whether there will be a monthly hike on LPG prices, too.

On Monday, Pradhan informed the Lok Sabha in a written reply that the government has authorised the OMCs to increase the retail selling prices of kerosene by 25 paise a litre a month for 10 months.

Currently, consumers covered by Pratyaksh Hanstantrit Labh, or PAHAL, get subsidy credit in their accounts for 12 cylinders in a year as and when they order for a refill. Others get 12 subsidised cylinders. This subsidy at current rates is Rs 63.91. Beyond 12 cylinders, they are required to pay the market-linked price.

The government has also decided to implement Direct Benefit Transfer in Kerosene during 2016-17 in 39 districts across nine states —Punjab, Gujarat, Himachal Pradesh, Madhya Pradesh, Chhattisgarh, Rajasthan, Jharkhand, Haryana and Maharashtra. “It has also been decided that the states would be given cash incentive of 75 per cent of subsidy savings during the first two years, 50 per cent in the third year and 25 per cent in the fourth year,” Pradhan added.