Wondering why the subsidy on the domestic LPG cylinder you ordered this month has not been credited to your bank account, like it is usually done? That’s because for the first time since at least 2011, the subsidy on the 14.2 kg domestic LPG cylinder has dropped to ‘zero’.
Two factors have resulted in this unusual situation. One, the price of the non-subsidised cylinder (that a customer pays upfront) fell sharply over the past few months due to the global price crash in crude oil and petro-products. Next, over the last year, the Centre had steadily increased the price of the subsidised cylinder to reduce the subsidy amount.
The subsidy amount is essentially the difference between the price of a non-subsidised cylinder and that of a subsidised one. With the former falling and the latter rising, the subsidy amount has been driven down to ‘zero’ in May. This is a sharp reversal from February when the subsidy amount had shot up to ₹312 a cylinder due to a spike in the price of non-subsidised gas.
The Centre provides subsidy, through direct benefit transfer to customers’ bank accounts, on 12 LPG cylinders (14.2 kg) a year per household. On purchases beyond 12 cylinders a year, the household has to pay the non-subsidised price.
Resets
The price of a non-subsidised cylinder is reset and published by the oil marketing companies every month — for May, it was fixed at ₹581.5 a cylinder in Delhi, down from ₹744 for April and ₹858.5 for February. The price of a subsidised cylinder is changed, at irregular intervals, on directions from the Centre and is not being published — in March, it was ₹574.5 a cylinder, up from ₹538.95 in October 2019. A possible further rise in subsidised LPG price since March would have whittled down the subsidy amount to ‘zero’ in May.
The Centre has steadily increased the price of subsidised cylinders since July last year. The Oil Minister stated in Parliament that the price of subsidised LPG has been hiked by ₹35.55 per cylinder between October 2019 and March 2020. Research house Nomura estimates that the price of a subsidised cylinder increased by about ₹59 between July 2019 and March 2020 for PMUY (Pradhan Mantri Ujjwala Yojana) customers and by about ₹80 for non-PMUY customers. The subsidised cylinder price seems to have been increased further in April and May; this has been calculated as the difference between the price of a non-subsidised cylinder and the subsidy amount (see table).
From August 2019, the subsidy amount for non-PMUY customers is ₹21 less per cylinder than for PMUY customers; the latter are from economically weaker sections of society.
Pricing mechanism
Will the LPG subsidy amount remain ‘zero’ in the coming months? That would depend again on the price movements of non-subsidised and subsidised LPG.
The pricing of non-subsidised LPG in India is done on the basis of the import parity price formula. This is determined, with a month’s lag, based on LPG prices in the international market (Saudi Aramco’s price), assuming that the fuel is imported into the country. So, international prices and currency movements will change the price of non-subsidised LPG in India. Given the flux in global energy markets due to the coronavirus impact, it remains to be seen how this plays out. Also, the Centre’s moves on subsidised LPG prices will play a role.
Unlike in the case of petrol and diesel where the Centre increased excise duty sharply in recent times to shore up revenue, the customs duty and GST on LPG has not been increased. Also, unlike the dip in consumption of most other petro-fuels due to the lockdown, LPG consumption in the country grew 12.2 per cent in April 2020 y-o-y. The PPAC (Petroleum Planning and Analysis Cell) says that this was mainly due to the government scheme of free refill of cylinders for poor households. Also, as people stayed at home, it enhanced the domestic consumption of LPG cooking gas.