Why have LPG prices seen a sharp rise? (How does LPG pricing work in India)

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 Why have LPG prices seen a sharp rise? (How does LPG pricing work in India)

Read more on - Polity | Economy | Schemes | S&T | Environment


    • LPG pricing mechanism in India: Domestic prices of LPG come from a formula - the import parity price (IPP) based on global LPG prices.
      1. Saudi Aramco's LPG price is the benchmark
      2. It includes free-on-board price, ocean freight, customs duties, port dues
      3. This dollar price is converted to rupees
      4. Then local costs are added - local freight, bottling charge, marketing costs, margins for OMCs, dealer commissions, GST
      5. That is the retail LPG sale price that is reset once a month.
    • Price trend: The Brent crude price was up, crossing $68 level but then came the Coronavirus crisis (COVID-19) and oil prices went down.
      1. Saudi Aramco propane prices went to $565 per tonne in Jan 2020 ($440 per tonne in Dec) [this is a benchmark for West Asia LPG sales to Asia]
      2. Dollar-rupee is within 71-72 Rs/$
    • Who are hit: Consumers who gave up LPG subsidy are hit the most. Those who are using subsidy, the price rise is absorbed in it. 
      1. Price of 1 unsubsidised cylinder goes from Rs.714 to Rs.858 (Delhi) - so subsidy went from Rs.153 to Rs.291
      2. A total of 26.12 crore consumers use subsidy
      3. For Ujjwala consumers, subsidy goes from Rs.174 to Rs.312 per cylinder
    • Open pricing regime: In August 2019, price rose by Rs.62, while in 5 years before that, the total price rise was Rs.82. Clearly, govt wants to end this subsidy eventually. But in 2020, the govt. is absorbing the price rise for the subsidised consumers. Why? As economic slowdown is biting, the govt. wants to shile the subsidised citizens.
    • What next: For Feb 2020, Aramco lowered the propane prices to $505 per tonne. If rupee-dollar remains stable, then LPG prices may go down.
    • High prices and slowdown: Non-subsidised consumers lose out more of their cash in hand. Headline inflation will be spurred higher. 
    • Summary : During an economic slowdown, the govt was forced to raise the LPG prices, thereby adversely affecting consumer purchasing power.
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                                                                                                                                                              PT's IAS Academy: Why have LPG prices seen a sharp rise? (How does LPG pricing work in India)
                                                                                                                                                              Why have LPG prices seen a sharp rise? (How does LPG pricing work in India)
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