Economy

Govt’s subsidy burden to turn lighter with steep hike in LPG cylinder prices

Twesh Mishra New Delhi | Updated on September 01, 2020 Published on August 31, 2020

Savings expected in the range of ₹18,000 crore to ₹22,000 crore

The government is eyeing a huge savings in subsidy this year on cooking gas.

The savings is because the price of a domestic LPG or cooking gas cylinder of 14.2 kg has been hiked by ₹100 a cylinder from July 2019 to July 2020.

 

The price of a subsidised domestic LPG cylinder increased from around ₹494.35 a cylinder in July 2019 to ₹594 a cylinder in July this year across the country. It will temper a bit more when the price of domestically produced natural gas is revised for the October-March 2021 period.

 

Subsidy savings

“There would be a subsidy savings of between ₹18,000 crore and ₹22,000 crore because of the rise in domestic LPG cylinder prices. In 2019-20, the LPG subsidy outflow stood at ₹22,635 crore. Till now, in the first quarter of 2020-21, there has been a subsidy outgo of just ₹1,905 crore. This is a significant saving for the government as there has been practically no subsidy on LPG for the last three months,” said K Ravichandran, Senior V-P & Group Head-ICRA Ltd.

It’s not that the government is keeping all this money with itself.

The government has offered free cylinders to Pradhan Mantri Ujjwala Yojana (PMUY) consumers during the Covid-19 pandemic. This covers some 8 crore consumers.

In all, India has about 27.76 crore LPG consumers. Of these, around 1.5 crore are not eligible to get an LPG subsidy since December 2016 because they have an annual taxable income above ₹10 lakh.

This leaves some 26.12 crore consumers who were eligible to get the subsidy relief from the budgetary allocations through a Direct Benefit Transfer in their bank accounts.

But, with the price of the subsidised LPG cylinder also being hiked, nearly 18 crore more consumers are now out of the support net that successive governments over the years had sustained.

“The government has now shifted its focus from relatively better off families getting the subsidy to poorer sections that are being identified by having PMUY connections,” a sector watcher said.

These 8 crore families have been offered three cylinders free of cost during the pandemic. To facilitate the same, the government has transferred ₹9709.86 crore into their bank accounts.

Distribution expense

“The expenditure on distributing free cylinders under the PMUY is much lesser compared to the overall LPG subsidy. The PMUY outflow is very limited and for 2019-20, the subsidy outgo was only ₹1,300 crore. The savings from this price increase would be much more than the expense for distributing free cylinders under the PMUY scheme,” Ravichandran said.

Rise in oil price

“At current crude price levels of around $45 a barrel (for the full fiscal 2020-21), there is a direct savings of ₹20,000 crore to the government on LPG subsidy. In a second scenario where crude oil prices will recover to $50 a barrel (average crude oil price not expected to be higher this fiscal), there may be an incremental subsidy burden rising to be about ₹4,300 crore. Here too, there will be a saving of ₹18,300 crore of LPG subsidy,” he added.

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Published on August 31, 2020
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