Govt saves ~20K cr with LPG subsidy pause

On September 1, cooking gas in India became dearer by ~25, to take its price to ~885 per 14.2kilo cylinder in the national Capital. Liquefied petroleum gas (LPG) price in the country has risen by more than ~300 since May 2020.

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

To save Indian households from global price shocks, the Government of India has been subsiding cooking gas for decades to keep prices stable for consumers.

But since May 2020, 290million 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 seems to have been no subsidy deposit either.

According to a Business Standard analysis, the government may have saved close to ~20,000 crore since the pandemic began, by not giving LPG subsidies. To be fair, the subsidy was probably unnecessary till the end of 2020 due to low LPG prices. But in 2021, product prices have been on the rise, demanding a subsidy in the usual scheme of things.

The government did, however, provide 141 million free LPG cylinders to the poorest LPG users in the country in 2020, by spending more than ~9,000 crore to provide relief to families hit by the pandemic. For this analysis, the price of a subsidised cylinder has been assumed at ~650 per cylinder. At the current market price of ~885, an average consumer could have received a subsidy of ~235 per refill/purchase in September.

The subsidy amount could have been close to ~210 in August and ~185 in July, with these assumptions.

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. This has been considered constant for May 2020 to date for the analysis.

The subsidy amount for each month has been calculated by subtracting ~650 (intended price of a subsidised cylinder) from the market notified price.

Using the monthly data provided by rating agency CRISIL and the data laid down in Parliament, the Business Standard analysis shows that the monthly savings from December 2020 to September would add up to a little more than ~20,000 crore.

In all fairness, it was known that the government would spend less on LPG subsidies. The Union Budget of 2021-22 puts the projected LPG subsidy outgo for the current fiscal year at ~14,073 crore, way less than the provisional amount of ~36,178 crore spent in 2020-21.

The interesting part is that LPG subsidy is not reaching even the poorest of the cooking gas households in India. The government expedited the penetration of LPG into lowincome households through the flagship Pradhan Mantri Ujjwala Yojana (PMUY). Among the 290-million domestic LPG consumers in India, 80 million are PMUY beneficiaries.

LPG subsidy — then & now

In April 2014, the Congress-led government paid ~567 as subsidy on a refill of 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 ~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 ~434 as subsidy on a cylinder that was priced at ~941, effectively costing the consumer ~506 per refill.

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

As oil crashed with the news and spread of the pandemic, the notified market price remained close to ~600 till November 2020 (to be precise, ~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 since December 2020, and have reached ~885 in Delhi in September. Last time when an LPG cylinder cost this much, the government had paid more than ~377 per consumer per refill. This time, the subsidy paid was zero.

In its initial years, the LPG subsidy programme consisted of two parts. Consumer benefit was the smaller part, close to ~22 per refill, while most of the subsidy was given to LPG marketing companies as underrecovery payouts to offset the losses they incurred by selling LPG at a price lower than its cost price.

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

On January 1, 2014, one LPG cylinder in India was priced at ~1,241 in Delhi. At that point in time, the average consumer got a subsidised cylinder at close to ~420. The subsidy component was as massive as ~800 per cylinder.

Currently, retail pricing of LPG is done using the import parity pricing method, and marketing companies notify a new price at the beginning of each month.

The subsidy amount (and thus, the price of a subsidised cylinder) is decided by the government in a way in which price shocks do not affect the consumer.