Shifting of LPG subsidy burden helps Centre adhere to budgetary allocations

The subsidy will remain within budgeted levels even though the average international price of LPG from April to October 2021 is 52.49% higher than the full-year average of FY21

India's annual subsidy burden on cooking gas is expected to remain within the Budgetary Estimates (BE) of Rs 14,073.35 crore despite the big surge in the international price of Liquefied Petroleum Gas (LPG). The subsidy will remain within the budgeted levels even though the average price of LPG in the international market (from April to October 2021) is 52.49 per cent higher than the full-year average of FY21.

Adherence to Budget 2021-22 allocations is possible because the Centre is currently bearing nil subsidy on domestic cooking gas, and has passed on the burden of moderating LPG prices to public sector oil marketing companies (OMCs).

This budgetary estimate includes Rs 12,480 crore that was to be transferred into the accounts of domestic LPG users, Rs 450 crore for additional subsidy payable to consumers in the North Eastern Region, Rs 1,078.35 crore as feedstock subsidy to the Assam Gas Cracker Complex, and Rs 65 crore at Project Management Expenditure.

This is also the lowest budgetary outlay for LPG subsidy in a decade. The Centre continues to subsidise a part of the higher freight costs incurred in transporting LPG cylinders to far flung areas from out of the trimmed down allocation.

In February 2021, when the Budgetary estimates for LPG subsidy were made, Saudi Aramco was selling LPG to India at $ 529.80 per tonne. This price has now risen by over 48 per cent to $ 784.43 per tonne for November 2021. This is the highest price at which Saudi Aramco is selling LPG to India over the last four years.

According to officials in the know, OMCs were taking a hit of approximately Rs 100 per 14.2 kilogramme (kg) domestic cylinder in October 2021. The international LPG price then was $ 664.27 per tonne and the price of a domestic cylinder stood at Rs 899.50 apiece. Domestic LPG prices have remained unchanged since October 6 at Rs 63.35 per kg.

Comparably, prices of a 19 kg commercial LPG cylinder stood at Rs 1734 apiece on October 6 and have risen to Rs 2000.50 apiece from November 1. This is an appreciation from Rs 91.3 per kg in October to Rs 105.26 per kg in November.

“There is certainly an under recovery which is over Rs 100 apiece now,” an analyst a domestic ratings agency told Business Standard.

It was immediately unclear how the oil companies would be able to recover this amount from the centre. In the past, before the Direct Benefit Transfer (DBT) regime kicked in, OMCs would sell domestic LPG cylinders at a discount to consumers. They would then seek a compensation from the centre for the ‘under recoveries’ that they have borne. This was a key segment in the budgetary allocations of yesteryears.

But after DBT, the oil companies would sell cylinders at full price to consumers, and the centre would then credit the subsidy amount directly into the accounts of recipients. This freed up the oil companies from the burden of first bearing LPG under recoveries, and getting the due amount credited to them. The present LPG pricing approach is a reversal to that system, but with no clarity on how the oil companies would be reimbursed.

“The OMCs also make money when the international LPG prices are lower. The present pricing issues are due to international factors. Since LPG is a scare and regulated commodity, the government can dictate the price at which it is sold in the country,” said Petroleum Ministry officials, maintaining that the OMCs can recover their losses at a later stage when global LPG prices cool down.