Cooking fuel subsidy may save govt ~6,500 crore

Cooking fuel subsidy may save govt ~6,500 cr The Centre’s decision to raise cooking fuel prices and to do so at regular intervals is part of a plan to restrict the subsidy on LPG and kerosene to BPL families. The three government-owned oil marketing firms have been asked to raise domestic LPG prices by ~4 a cylinder every month. The move is likely to save the Centre at least ~6,500 crore on the petroleum subsidy in FY18. writes

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 governmentowned oil marketing companies (OMCs) have been asked to raise domestic LPG prices by ~4 a cylinder every month. Earlier, from July 1, 2016, the government had allowed them to increase the price by ~2 a month. The move is likely to save the government at least ~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 ~3,000 crore.

The government had estimated an LPG subsidy of ~15,800 crore in 2017-18. According to the petroleum ministry, the cash transfer of subsidy to customers under direct benefits transfer will be ~44.23 a cylinder, of which ~29.02 will be compensated by the government and ~15.21 by the OMCs. Subsidised LPG in Delhi was ~477.46 a cylinder in July; the non-subsidised price was ~564. The subsidy is restricted to 12 LPG cylinders in a year. Those with annual income above ~10 lakh get no subsidy.

Also, from August 2016, kerosene prices were being increased every month. So far, the price has been raised to ~6.05 a litre, an increase of about 50p a litre. With the increase in subsidised domestic LPG prices by ~4 a cylinder per month, these can be deregulated in around two years, considering the LPG subsidy of ~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 ~7,595 crore, from ~11,496 crore in 2015-16. The LPG subsidy saw a 24 per cent decline to ~12,133 crore in 201617. In the Union Budget presented in February, the government had allocated ~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 ~2.31 per cylinder on Tuesday by OMCs. In Delhi, price of cooking gas now stands at ~479.77, against ~477.46 in July.