The price cut especially for non-ujjwala beneficiaries was avoidable. It will serve no purpose and will be a drain on already strained oil companies
For several decades, it has been a common practice for governments to make decisions based on political expediency ignoring economic considerations. The incumbent Modi – dispensation has tried to change this practice but he too has fallen back to business as usual. One such area is the LPG subsidy.
On August 29, 2023, the Union Cabinet approved a reduction in the price of domestic cooking gas by Rs 200 per cylinder (14.2 kg) effective from August 30, 2023. De jure, the price of LPG is deregulated. How could the government decide on it? The reason is sale of LPG for household consumption is made by the three major oil marketing PSUs – Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) which are majority-owned and controlled by the Centre. So, the latter can give orders to the former.
The benefit of a price cut will be available to all the 330 million domestic consumers of LPG. They will now pay Rs 903 per cylinder (in Delhi) down from the existing Rs 1103 per cylinder.
Out of 330 million domestic HHs, 96 million are covered under the Pradhan Mantri Ujjwala Yojna or PMUY (under this scheme, the Centre provides free gas connection). They were already getting a subsidy of Rs 200 per cylinder for up to 12 refills per year. They will now pay Rs 400 less than the market/cost-based price or Rs 703 per cylinder in Delhi. Meanwhile, the government will provide an additional 7.5 million connections under PMJY, taking the total number of beneficiaries to 103.5 million. The Centre giving subsidies to all HHs (and more to Ujjwala Yojna beneficiaries) is out of sync with the policy signals it had started giving from January 2015.
Subsidy on LPG is the excess of its cost of supply – it is made up of the refinery-gate price or RGP (taken as import parity price or IPP and export parity price or EPP in the ratio of 80:20), freight, marketing costs, marketing margin, dealers’ commission, and taxes and duties – over the price paid by the beneficiary. It ought to be given only to those HHs who are poor and can’t pay the cost-plus price. Moreover, it should be withdrawn when the beneficiaries stand on their own.
In the past, ignoring these cardinal principles, the subsidy was given to anyone who had an LPG connection. It went to all and sundry including the rich. The poor who alone should have got it sat at the bottom. According to the Economic Survey (2015-16), only 0.07 per cent of LPG subsidies in rural areas went to a fifth of the poorest households. In urban areas, the poorest fifth got only 8.2 per cent.
A lot of subsidies went to fake beneficiaries or the diversion of stocks (albeit subsidized) of LPG cylinders to hotels, restaurants, and other commercial users.
Despite lacking sound justification, sheer populism drove politicians to give subsidies. They found ways to give it without taking the burden on the Centre’s balance sheet (BS). Initially, the subsidy on LPG (besides petrol, diesel, and kerosene) was cross-funded/subsidized by charging more on the sale of other products such as fuel oil, LSHS, naphtha, ATF, etc. hence, no burden on the budget, In 2002-03, the Vajpayee-led NDA government ended the above system and decided to give subsidy on these products directly from the budget with an intent to eventually disband them. The UPA government which took charge in 2004, even while continuing with the subsidized sale, used disingenuous methods such as the issue of oil bonds to PSUs, and the sale of domestic crude by ONGC and OIL, etc. at a discounted price to IOCL/BPCL/HPCL to fund it.
In June 2010, petrol was decontrolled followed by diesel in November 2014. As for LPG, the Kelkar Committee recommended the removal of 25 per cent of the subsidy in 2012-13 and 75 per cent in the following two years. Modi Government which took charge in May 2014, started acting on it but in a calibrated manner.
On January 1, 2015, it launched a direct benefit transfer (DBT) of subsidy. Under DBT, oil PSUs deliver the cylinder to the beneficiaries at a full cost-based price and follow it up by depositing a subsidy in the beneficiary’s account. In turn, they claim reimbursement of the subsidy amount from the Centre. This has helped in eliminating fake beneficiaries and curbing misuse that was inherent in the erstwhile system wherein subsidy was embedded in the price. In June 2020, the government stopped giving subsidies. Was this a conscious policy decision?
This wasn’t the case or else it would not have made a provision for it in the budget for 2020-21 being Rs 36,000 crore. The reality is that in that year, there was a steep decline in international prices (due to the COVID-19 pandemic) leading to a fall in price to Rs 600 a cylinder even on a cost-plus basis; hence subsidy support wasn’t required. The budget allocation was used largely to clear past dues of oil PSUs and provide free gas connections under PMUY.
During 2021-22 when the international price rose due to waning COVID and demand revival, the retail price of LPG zoomed to over Rs 900 per cylinder. This led the government to restore subsidies, but only for PMUY beneficiaries – a move that protected the poor while denying subsidies to the rest. It spent Rs 14,000 crore during that year. During 2022-23, it spent Rs 9,170 crore on those under PMUY. But, these numbers don’t give the full picture.
From June 2020 to June 2022, the government had asked the trio namely IOCL/BPCL/HPCL to sell LPG at a price below cost and gave them a one-time grant of Rs 22,000 crore to compensate for the losses incurred. This was nothing but subsidy (albeit ‘hidden’) given to all and sundry, and not just PMUY beneficiaries. This was a retrograde move and the retrogression is being continued during 2023-24.
In the Budget for 2023-24, Finance Minister Nirmala Sitharaman kept the budget estimate (BE) for LPG subsidy at a mere Rs 2,257 crore. With the subsidy at Rs 200 per cylinder, outgo on an average of 4 fills in a year per beneficiary comes to Rs 800. For 96 million PMUY beneficiaries, the subsidy requirement would be Rs 7,680 crore annually. The shortfall will have to be made up by seeking supplementary authorization from the Parliament.
But the real prick comes from the Cabinet’s decision to reduce the price by Rs 200 per cylinder for all 330 million HHs. Taking 4 fills per HH, the annual burden comes to Rs 26,400 crore. Since the decision is effective from August 30, 2023, for the remaining seven months, the outgo would be Rs 15,300 crore.
The international price of crude is on the rise. Already, the price of the Indian crude import basket has increased from around US$ 75 per barrel in June 2023 to US$ 90 per barrel currently. This has led to a corresponding increase in LPG price as the two are linked. Given the cost-plus price going beyond Rs 1103, there will be pressure to give more subsidies to keep the voters happy. The Centre could end up giving well more than Rs 25,000 crore during the current year! The price cut especially for non-Ujjwala beneficiaries was avoidable. But, thanks to competitive populism, even Modi has drifted.
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