In June 2020, the Government stopped giving LPG subsidies. It is time to do away with the hidden subsidy on the cylinder for better fiscal management
In the Union Budget for 2023-24, finance minister Nirmala Sitharaman has shown an expenditure of Rs 9,170 crore on petroleum subsidy (this is primarily a subsidy on LPG for household consumption) during 2022-23 as per the revised estimates (RE). She has kept the budget estimate (BE) for 2023-24 at Rs 2,257.09 crore.
By definition, a subsidy on the purchase of any given product is financial assistance given by the state to a certain class of persons who cannot afford to pay the market-based or cost-plus price from their limited income. 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.
In June 2020 the Government stopped giving LPG subsidies. It is baffling how it continues even now. A viable subsidy scheme rests on two major planks: (i) the beneficiaries are poor; (ii) subsidies should not become entrenched and be withdrawn when the beneficiaries stand on their own. In the past, throwing these principles to the wind, successive regimes gave subsidies to anyone – irrespective of income – who had an LPG connection. It meant that all and sundry including the rich enjoyed it.
The poor who alone should have got it sat at the bottom. According to the Economic Survey (2015-16), only 0.07 percent of LPG subsidies in rural areas went to a fifth of the poorest households. In urban areas, the poorest fifth got only 8.2 percent. 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.
Before January 1, 2015, misuse/diversion was inherent in the system of delivering subsidies as the Union Government asked the three major oil marketing PSUs – Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) to sell LPG to eligible beneficiaries at a low price who in turn, would claim the excess of the cost of delivering at the retail point over the price as subsidy from the former.
The governments of the day were aware of the flaws but did little to get rid of them. 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 Centre’s budget, the powers that be were unperturbed.
In 2002-03, the NDA government under Vajpayee ended the above system and decided to give subsidy LPG et al directly from the budget. It wanted to make these subsidies transparent with an intent to eventually disband them. The UPA government which took charge in 2004, even while continuing with the subsidized sale of these products, didn’t provide funds from the budget.
Instead, it took recourse to disingenuous methods such as the issue of oil bonds to PSUs, and the sale of domestic crude by upstream PSUs viz. ONGC, OIL, etc at a discounted price to IOCL/BPCL/HPCL to pay for the subsidy. Meanwhile, some action was seen in June 2010 when petrol was decontrolled followed by the removal of control and withdrawal of subsidy on diesel too in November 2014. The same on kerosene ended a couple of years later.
As for LPG, despite the Kelkar Committee recommendation in 2012-13 for the removal of 25 percent of subsidy and 75 percent in the following two years, no action happened till January 1, 2015, when the Modi Government launched direct benefit transfer (DBT) of LPG. Under it, oil PSUs deliver the cylinder to the beneficiaries at full cost-based price and follow it up by depositing subsidy in the beneficiary’s account and claiming reimbursement from the GOI.
This system addressed the problem of fake beneficiaries and the diversion of stocks. Even as the Government has added about 90 million poor households by providing them with the free connection under the Pradhan Mantri Ujjwala Yojana (PMUY), no serious effort was made to exclude the better-off who as of June 2020, accounting for nearly 2/3rd of the total beneficiaries about 300 million.
In June 2020, the Government stopped depositing subsidies in the account of beneficiaries without issuing any order. That it didn’t intend it, this would be clear from a provision of Rs 36,000 crore made by the FM in the budget for 2020-21 (presented on February 1, 2020). The fact of the matter is: in the wake of the Covid – 19 pandemic and worldwide destruction of demand, the international price of crude oil and all petroleum products including LPG plummeted.
As of June 2020, the cost of supplying LPG at the retail level was coming to Rs 600 per cylinder. In this scenario and consumers get access at a low price of Rs 600 even on a cost-plus basis (earlier, for achieving this price, the Government was giving subsidy), subsidy support wasn’t even required. The crude price started moving northward from US$ 22 per barrel in May 2020 to US$ 72 per barrel in August 2021; the international price of LPG too increased in tandem leading to a hike in its cost at the retail level to Rs 900 per cylinder. Concerned over the price increase, the government started giving subsidies but restricted them only to PMUY beneficiaries. During 2021-22, it spent Rs 14,000 crore.
In retrospect, if the government stopped paying subsidies during 2020-21, it was due to the fortuitous circumstance of the steep decline in international price (due to Covid) whereas its restoration during 2021-22 was due to waning Covid, the revival of demand world-wide and resultant increase in price. The change vis-à-vis the period before 2020-21 is that now subsidy is restricted to PMUY households. The exclusion of over 2/3rd out of a total of 300 million is welcome. But, the moot question is why should LPG subsidy be continued at all. Even under PMUY, the government intended to give free gas connections, not subsidize the purchase of cylinders.
From the budget perspective, this is not sustainable. At the current subsidy rate of Rs 200 per cylinder (14.2-kg), the outgo for 12 fills in a year per beneficiary comes to Rs 2400. For 90 million PMUY beneficiaries, the requirement will be Rs 21,600 crore. Even if we take 4 fills in a year (being average for FY 2021-22), this would be Rs 7200 crore. Against this, the BE for 2023-24 is a mere Rs 2,257.09 crore. There is another worrying aspect.
Currently, the cost of a cylinder is about Rs 900 (in Delhi), beneficiary won’t be satisfied with a subsidy of Rs 200 as she will still have to pay Rs 700 from her pocket. This will build pressure for increasing the subsidy which will intensify given the unfolding geo-political situation and firming up of international prices (Morgan Stanley projects crude to go up to US$ 110 per barrel in the second half of CY2023). The government should exit from the LPG subsidy completely. It should also avoid giving ‘hidden’ subsidies as it did by asking the three oil PSUs viz. IOC, BPCL, and HPCL are to sell at price below cost and give them a one-time grant of Rs 22,000 crore to compensate for the losses incurred from June 2020 to June 2022.
(The writer is a policy analyst)
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