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Insights into Editorial: Why have LPG prices seen a sharp rise?

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Insights into Editorial: Why have LPG prices seen a sharp rise?

High_on_gas

Context:

In recent, LPG prices, which are revised on a monthly basis, went up again. The rate for unsubsidised, 14.2 kg cylinders has risen by a steep Rs.144.50 in Delhi, at Rs.858.50. In January 2020, a non-subsidised LPG cylinder cost ₹714 in Delhi. In three other metros too, LPG prices jumped — Kolkata: ₹896 (increase by ₹149); Mumbai: ₹829.50 (increase by ₹145); and Chennai: ₹881 (increase by ₹147). The recent price hike has been the sharpest since January 2014.

Importance of usage of Liquefied Petroleum Gas (LPG) in an Economy:

LPG, the Liquefied Petroleum Gas is an integral part of every household and hence the budget at home. Any rise or fall in the cost of LPG cylinder affects the financial plan of a family. The most common use of LPG is for cooking both domestic as well as commercial. In addition to this LPG is also used for running automobiles and for refrigeration etc. LPG which is the mixture of hydrocarbon gases is the product obtained after refining crude oil (petroleum). Most of the crude oil is imported in India.

What influences LPG prices in India?

Domestic prices of liquefied petroleum gas (LPG) are based on a formula the import parity price (IPP), which is based on international LPG prices. Saudi Aramco’s LPG price acts as the benchmark for the IPP and includes the free-on-board price, ocean freight, customs duties, port dues and the like. This dollar-denominated figure is converted into rupees before local costs — such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions and the GST are added. This helps the government arrive at the retail selling price for LPG. The government resets the LPG price every month, the decision being influenced by international prices and how the rupee has behaved against the dollar in the immediately preceding weeks.

PaHaL – Direct Benefit Transfer Scheme for LPG:

PaHaL (Pratyaksha Hastaantarit Laabh) is the abbreviated alternate Hindi name for the Direct Benefit Transfer (DBT) Scheme existing in India for the direct cash transfer of subsidy for Liquefied Petroleum Gas (LPG) used in household cooking. Prior to the introduction of direct benefit transfer or direct cash transfer, LPG was sold at subsidised prices to all households through public sector oil marketing companies (private sector refiners were not allowed to distribute the subsidised LPG), leading to black marketing and diversion of subsidised/low priced cylinders for industrial or auto/transport uses. Cash transfer is an alternate form of giving subsidy wherein the amount contributed by the Government to suppress the price of the product is given directly to the consumer, leaving the price of the product to be determined by market forces. Thus, contrary to general perception, DBT is not elimination or substitution of subsidy, but an alternate way of giving subsidy. DBT is designed to ensure that the benefit meant for the genuine domestic customers reaches them directly and is not diverted. By this process public money is saved, just as fake and duplicate connections cease to exist. Under DBT, subsidy is available only to those who opt for it, thus ensuring self-selection and avoiding universal coverage. Capping the price of LPG for household consumption had also led to production distortions and stress on distribution infrastructure.  DBT intends to correct such distortions in the industry.

How have international prices behaved recently?

The Brent crude price had been on an uptrend, and had breached the $68 level late that month. It peaked at $68.91 in early January, but with the coronavirus (COVID-19) disease hogging headlines in recent weeks, fears of a global slowdown have pushed oil prices down through January, save for a few spikes. Saudi Aramco had raised its propane prices to $565 per metric tonne in January, up sharply from $440 a metric tonne set for December. Aramco propane prices offer a benchmark for pricing the West Asia LPG sales to Asian markets.

The dollar-rupee dance has since been within the range of ₹71-₹72 to the dollar, having briefly breached the Rs.72 mark in early January.

Who will the price rise affect?

The price increase will affect retail consumers who have given up the subsidy. The government has said that for those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy. The Centre said the price of an unsubsidised cylinder would increase from ₹714 to ₹858.50 in Delhi, for example, and that the subsidy offered would go up from ₹153.86 to ₹291.48. Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy.

Likewise, for Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.

Does this help the government move to an open pricing regime?

Prior to the latest round of the price increase, the government had raised LPG cylinder prices by ₹62, starting from August 2019. Compare this with the increase of ₹82 that had taken place over five years to mid-2019, indicating a penchant for increasingly lesser subsidy. In the latest round, though, the Centre has sought to absorb much of the increase for those availing subsidies. It looks like the most recent increase has been beyond its control and it is hence raising the subsidy levels to protect consumers, given that the economy is reeling from lack of consumer spending.

GiveItUp Campaign:

  • Domestic LPG is heavily subsidized by the Government of India and every cylinder that we use in our kitchen carries a substantial subsidy.
  • This translates to a huge annual subsidy burden on the Government, draining precious resources which otherwise could have been used in developmental activities. Subsidy on domestic LPG instead of being universal needs to meet the needs of the truly needy citizens.
  • Fortunately, many able and aware citizens are not in favour of subsidies and would rather pay the full price for the products and, thereby they also make a personal contribution towards nation-building. There is a need to spread this message.
  • Accordingly, the Government has launched the ‘#GiveItUp’ campaign which is aimed at motivating LPG users who can afford to pay the market price for LPG to voluntarily surrender their LPG subsidy.

Conclusion: Implications for the broader economy:

At a time when consumer demand, in general, for goods and services in the country has slumped, more cash in the hands of the retail consumer may have helped spur demand. It is ironic that the government has had to raise LPG prices now. This sucks away even more disposable income from those consumers who pay market rates for LPG.

As a result, household budgets are bound to go up, especially for those not availing the subsidy. The increase in LPG price could spur headline inflation even further. As it is, the consumer price index inflation has seen a rise over the past few months.