The crushing burden of rising LPG prices on household budgets, and the subsidy equation
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LPG subsidy in India - An explainer
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- The story: To save Indian households from global price spikes that affect cooking gas prices, the Government of India has been subsiding cooking gas for consumers, to negate the volatility, and keep prices steady. But since May 2020, the 29 crore LPG-using homes have not received any consumer subsidy on purchasing LPG. There has been no official intimation on its discontinuation, but there has been no deposit of subsidy either.
- Prices globally and locally: There was no need for subsidy in the low-oil-price phase of 2020, but LPG prices zoomed in 2021. The Centre has not transferred subsidy at any point in 2021, and on September 1, 2021, cooking gas in India again became dearer by Rs 25 (price became Rs 885 per 14.2 kg cylinder). LPG prices have risen by more than Rs 300 since May 2020, a crushing blow to middle class families. Rising crude oil prices have driven this, as Brent crude futures rose from their May 2020-low of $21.44 per barrel to $72.7 per barrel at the end of August 2021.
- How much did government gain: This total pause in subsidies led to govt. gaining a lot.
- It may have saved close to Rs 27,000 crore since the pandemic began, by not giving LPG (as per Business Standard)
- Calculation: Assume the price of a subsidised cylinder at the level it was last observed, close to Rs 600 (April and May 2020). At the current market price of Rs 885, an average consumer could have received a subsidy of Rs 285 per refill/purchase. India consumes close to 14.5 crore LPG cylinders in a month, i.e. an average consumer household requires one cylinder every two months. Using monthly data by Crisil, and in the Parliament of India, the monthly savings add up to Rs 27,255 crore (assume a constant price of Rs 600 for a subsidised cylinder).
- Even at Rs 650 per cylinder, the subsidy savings run into more than Rs 20,000 crore.
- That the government will spend less on LPG subsidies was known in advance. How? The Union Budget 2021-22 had put the projected LPG subsidy outgo for the current financial year at only Rs 14,073 crore, much less than the provisional amount of Rs 36,178 crore spent in 2020-21.
- How LPG subsidy changed: In April 2014, the government paid Rs 567 as subsidy on one LPG cylinder. Oil prices began falling months after a new government led by the BJP came to power. The subsidy component went below Rs 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 2018, the government of India paid Rs 434 as subsidy on a cylinder that was priced at Rs 941, effectively costing the consumer Rs 506 per refill.
- Oil prices rose just before the pandemic set it. In March 2020, the subsidy per cylinder was Rs 231. The market price was Rs 806, and the consumer paid Rs 575 for a subsidised cylinder.
- As oil crashed with the news and spread of the pandemic, the notified market price remained close to Rs 600 till November 2020 (to be precise, Rs 594). There was no need to subsidise as this market price was close to the effective price a consumer paid on a subsidised cylinder.
- Prices have been rising December 2020, and have reached Rs 885 in Delhi in September 2021. Last time when an LPG cylinder cost this much, the government used to pay more than Rs 377 per consumer per refill. The present government is politically weathering the storm, and not reacting to criticism.
- Two part subsidy: The LPG subsidy programme used to consist of two parts - (i) Consumer benefit was the smaller part, close to Rs 22 per refill, and (ii) most of the subsidy was given to LPG marketing companies, as under-recovery payouts to offset the losses they incurred by selling LPG at a price lower than its cost price. The latter part was based on market prices.
- In 2005-06, the Centre spent close to Rs 12,000 crore a year on LPG subsidies. Subsidies rose when LPG prices rose on the backdrop of rising crude oil prices.
- On January 1, 2014, one LPG cylinder in India was priced at Rs 1,241 in Delhi, the highest ever. The average consumer got a subsidised cylinder at close to Rs 420. The subsidy component was as massive as Rs 800 per cylinder (it was the UPA-2 government).
- Household budgets: While the government has managed its own budget nicely, the households have witnessed an evaporation of their disposable incomes. The high fuel prices (petrol, diesel) coupled with high LPG prices have meant household spending has little scope left for consumer durables, or other consumption items, thereby dampening overall demand in the economy.
- EXAM QUESTIONS: (1) Explain the subsidy mechanism for LPG in India. (2) Why is the government not offering any subsidy on LPG at the moment? (Sept 2021)
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