The allocation for petroleum subsidy in the Union Budget has varied with the rise in liquefied natural gas (LPG) consumption on the back of new free cooking gas connections. These connections were disbursed under the Pradhan Mantri Ujjwala Yojana, driving the number of LPG consumers by over 8 crore, taking the total number of consumers to 27.76 crore households.

But the subsidy burden did not increase in the same proportion because of softening crude oil prices.

In addition to the cheaper crude, the Centre has also been gradually lowering the effective subsidy per 14.2 kg domestic LPG cylinder.

The price of a subsidised domestic LPG cylinder increased from around ₹494.35 a cylinder in July 2019 to ₹594 in July this year. The price of the domestic cylinder has, however, remained unchanged since then.

With the crash in crude oil prices in the current fiscal, the subsidy has been lowered to nil for most of the current fiscal.


Subsidy savings

According to K Ravichandran, Senior V-P & Group Head-ICRA Ltd, “There would be a subsidy savings of between ₹18,000 crore and ₹22,000 crore because of the rise in domestic LPG cylinder prices.”

It’s not that the government is keeping all this money with itself. It has offered three free cylinders to PMUY consumers during the lockdown months.

The cost of supplying these cylinders comes to roughly ₹15,000 crore that has been parked in the bank accounts of these consumers through Direct Benefit Transfer.

As for Budget 2021, the government may face negligible subsidy burden on account cooking gas. This is because at the current price point, most of the LPG consumers are out of the subsidy net. Crude oil prices are expected to remain range-bound, thus keeping LPG prices low.

The only expense will be on account of disbursing any new connections (which will be very low considering the nearly 100 per cent existing LPG coverage), or for giving a new subsidy only to the economically weakest sections of society.