The government’s latest decision to raise cooking fuel prices and to do so at regular intervals is part of a plan to restrict the subsidy on liquefied petroleum gas (LPG) and kerosene to below poverty line families.
The three government-owned oil marketing companies (OMCs) have been asked to raise domestic LPG prices by Rs 4 a cylinder every month. Earlier, from July 1, 2016, the government had allowed them to increase the price by Rs 2 a month. The move is likely to save the government at least Rs 6,500 crore on the petroleum subsidy in this financial year. The monthly increase of about 50p a litre on kerosene is expected to save another Rs 3,000 crore.
The government had estimated an LPG subsidy of Rs 15,800 crore in 2017-18. According to the petroleum ministry, the cash transfer of subsidy to customers under direct benefits transfer will be Rs 44.23 a cylinder, of which Rs 29.02 will be compensated by the government and Rs 15.21 by the OMCs. Subsidised LPG in Delhi was Rs 477.46 a cylinder in July; the non-subsidised price was Rs 564. The subsidy is restricted to 12 LPG cylinders in a year. Those with annual income above Rs 10 lakh get no subsidy.
Also, from August 2016, kerosene prices were being increased every month. So far, the price has been raised to Rs 6.05 a litre, an increase of about 50p a litre. With the increase in subsidised domestic LPG prices by Rs 4 a cylinder per month, these can be deregulated in around two years, considering the LPG subsidy of Rs 86.5 a cylinder for July 2017. “As the government aims to deregulate LPG prices by reducing the subsidy level to nil, the risk related to material underrecovery burden on OMCs or public sector upstream (exploration and production) companies in a high crude oil price scenario has reduced significantly. This is a credit-positive for the PSU oil companies if crude prices increase beyond $65 a barrel over the long term,” said K Ravichandran, senior vice-president at ratings agency ICRA.
The deregulation would also open the market for private entities and the OMCs might face increased competition over the longer term.
For 2016-17, the subsidy outgo on kerosene dropped by 33 per cent to Rs 7,595 crore, from Rs 11,496 crore in 2015-16. The LPG subsidy saw a 24 per cent decline to Rs 12,133 crore in 2016-17. In the Union Budget presented in February, the government had allocated Rs 25,000 crore for petroleum subsidy.
Dharmendra Pradhan, petroleum minister, told the Rajya Sabha on Tuesday that the subsidy would only be rationalised.
However, the price of subsidised LPG was only increased by Rs 2.31 per cylinder on Tuesday by OMCs. In Delhi, price of cooking gas now stands at Rs 479.77, against Rs 477.46 in July.
 "LPG price increase: Govt aims to save Rs 6,500 cr on subsidy this year")
