On 29 August, the Narendra Modi government announced a subsidy of Rs 200 per LPG cylinder to reduce the price of a 14.2 Kg LPG cylinder from Rs 1,103 per cylinder (in Delhi) to a 'more affordable’ price of Rs 903 per cylinder.
The 9.6 crore households covered under the Pradhan Mantri Ujjwala Yojana (PMUY), out of a total 31 crore domestic LPG consumers, will get this subsidy in addition to the existing Rs 200 making the price Rs 703 per cylinder for them.
While the decision was aimed at pleasing the poor and middle-class households and is going to have a positive effect on retail inflation (estimated at ~.3 percent), it raises several questions.
Some Pressing Questions
Is Rs 1,103 the real cost/market price of an LPG cylinder for oil marketing companies (OMCs)?
Why did the government extend a subsidy of Rs 200 to non-PMUY consumers? Does it mark the end of the oil and gas products pricing reforms?
Is Rs 400 per cylinder subsidy to PMUY consumers a freebie? Or, if the real cost/market price had fallen, is it a 'nobie' (a fiscal, costless freebie)?
Market Price Reduction Camouflaged As LPG Subsidy
In a PIB Note issued on 13 February 2020, the Ministry of Petroleum and Natural Gas (MoPNG) informed that the primary LPG price is determined based on the international market price of LPG and the government determines the subsidy to be provided to LPG consumers administratively under then prevailing LPG subsidy scheme – PAHAL.
On the same note, the MoPNG informed that on account of the increase in the international price of LPG during January 2020 from USD 448/MT to USD 567/MT, the price of domestic, non-subsidised LPG cylinder was increased from Rs 714 per cylinder to Rs 858.50 per cylinder.
The Petroleum Planning & Analysis Cell (PPAC), under the administrative control of the MoPNG, tracks and reports international price movements in LPG like other petroleum products. The July 2023 Snapshot Report of PPAC informs that the international LPG price had come down to only USD 385/MT in July 2023 whereas the average international prices were USD 692.67/MT in 2021-22 and USD 711.50/MT in 2022-23.
The LPG cylinder price revision data put out by Indian Oil Corporation on the website indicates that, for Delhi, the price per cylinder remained between Rs 719-Rs 819 during 2020-21, between Rs 809-Rs 949.50 in 2021-22 and Rs 949.50- Rs 1103 in 2022-23.
The LPG prices, thus, have not been revised down from Rs 1,103 per cylinder fixed on 1 March 2023 although the international prices have come down from the average of USD 711.50/MT in 2022-23 to USD 385/MT in July 2023 – a reduction of more than 45 percent.
The OMCs did suffer under-recoveries post-Ukraine-Russia war for some time in 2022-23. However, they have made up for these under-recoveries and have reported healthy profits for the last two quarters.
The subsidy of Rs 400/200 is a camouflage for the OMC’s real cost reduction of LPG cylinders.
It is Not Welfare; It is 'Nobie'
Subsidy, in cash or kind, provided by the government from the budget to the poor and vulnerable is welfare, to the undeserving and non-poor a freebie, and to anyone, without any fiscal cost, a 'nobie'.
Free foodgrains delivered to undernourished households/persons is welfare but to non-under-nourished persons (a good part of 81 crore ration card holders fall in this category) a freebie.
Likewise, free/subsidised electricity/water delivered to middle-class households of Delhi is not welfare but freebies.
On the same principle, subsidising PMUY household with LPG subsidy is welfare but to non-PMUY households – a freebie.
The exact equivalent domestic LPG cylinder price at USD 385/MT has not been disclosed by the OMCs. However, given the international price trends, the domestic equivalent price would be somewhere between Rs 607- 703 per cylinder. It is unlikely to exceed Rs 703 per cylinder.
Therefore, in the present case, when the cost of an LPG cylinder is less than even the subsidised price to PMUY households, there is no real subsidy to anyone. It is, therefore, a plain and simple 'nobie'.
Price Reforms in the Petroleum Sector
Petroleum sector, like electricity, has suffered from the politics of populism for many years.
After considerable fiscal suffering, the governments – from 2012 onwards could finally institute a system of non-subsidised market pricing of principal consumer petroleum products – petrol, diesel, and LPG by 2015.
The petrol and diesel prices began getting revised every day linked to the import price party, rupee exchange price, and the cost of production.
While there was no real market, the prices so determined administratively were quite close to it.
The system worked reasonably well until 2018, when the crude oil prices rose beyond USD 75 per barrel. The government did not allow the OMCs to effect daily price changes during the Karnataka elections in 2018. This practice was routinely repeated in Lok Sabha & other Assembly Elections, thereafter.
COVID 19 brought the crude oil prices crashing down. The government mopped up most of the gains by raising the excise duty & cesses. The Ukraine-Russia war brought the reverse price shock.
The government resorted to discontinuing daily price revisions, leaving the OMCs with under-recoveries and bringing down the excise duty cess partly to manage the situation. After April 2022 when the daily price revision stopped completely, the petroleum product pricing system became completely opaque.
The abandonment of the market-linked price regime for petrol, diesel, and LPG had its collateral damage. The OMCs suffered losses net losses for two-three quarters in 2022-23. The plan to privatise BPCL had to be shelved. The government had to provide a one-time grant of Rs 22,000 crore to PSU OMCs. The government had to provide Rs 30,000 crore in the 2023-24 budget to capitalise OMCs, including HPCL, earlier sold to ONGC.
The petroleum sector reforms have become completely muddled, if not dead.
There is an inescapable necessity for reforming the petroleum and natural gas sector to make it completely market-oriented.
The OMCs need to be privatised and the prices of petroleum and gas products allowed to be fully market determined.
On occasions when the oil and gas product prices rise inordinately and the poor and lower middle-class consumers need to be protected, the government can provide direct cash benefit support.
The sooner these reforms and welfare systems are implemented, the better for the nation, people, and government.
(The author is former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)