As state-owned oil companies grapple with massive losses from selling LPG below cost, the Govt is set to allocate Rs 35,000 crore in subsidies to mitigate the financial burden
During the current financial year (FY) 2024-25, the state-owned Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) are expected to incur an under-recovery of Rs 19,550 crore, Rs 10,400 crore and Rs 10,570 crore respectively on sales of LPG to household consumers. To make up for this loss totalling Rs 40,500 crore, the Union Government is likely to provide a subsidy of Rs 35,000 crore. In the Budget for 2025-26, to be presented on February 1, 2025, Finance Minister Nirmala Sitharaman will make a provision of Rs 10,000 crore in the revised estimate (RE) for the current FY and the remaining Rs 25,000 crore in the budget estimate (BE) for 2025-26.
The under-recovery arose because these corporations sold LPG for Rs 803 per 14.2-kg cylinder against the cost of supplying at the retail point being higher. The cost is calculated as 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) plus freight, marketing costs, marketing margin, dealers’ commission, and taxes and duties. During the current FY, the cost is Rs 1043 per cylinder, and the loss is Rs 240 per cylinder which on total sales of 169 crore cylinders would be Rs 40,500 crore. Modi - government had stopped giving subsidies on LPG during FY 2021-22. Then, how come, it continues to make huge payments from the budget? LPG is an environment and human-friendly fuel that meets the needs of millions of households (HHs).
Subsidy on LPG ought to be given only to those HHs who are poor. The government also needs to track the income status of the beneficiaries and withdraw support from those who become better off and can pay cost-based prices. Ignoring these cardinal principles, the subsidy was given to anyone who had an LPG connection. It went to all and sundry including the rich. The poor who alone should have got it sat at the bottom. According to the Economic Survey (2015-16), only 0.07 per cent of LPG subsidies in rural areas went to a fifth of the poorest households. In urban areas, the poorest fifth got only 8.2 per cent.
A lot of subsidies went to fake beneficiaries or the diversion of stocks (albeit subsidised) of LPG cylinders to hotels, restaurants, and other commercial users. Despite lacking sound justification, sheer populism drove politicians to give subsidies to all and sundry. They found ways to give it without taking the burden on the Centre’s balance sheet. Initially, the subsidy on LPG (besides petrol and diesel) was cross-funded/subsidised by charging more on the sale of other products such as fuel oil, naphtha, ATF, etc. hence, no burden on the budget. In 2002-03, the Vajpayee-led NDA government ended the above system and decided to give subsidies on these products directly from the budget with the intent to eventually disband them. But, that was not to be.
The UPA government which took charge in 2004, even while continuing with subsidised sales, used disingenuous methods such as the issue of oil bonds to IOCL/BPCL/HPCL (instead of losses incurred by them due to selling these products at below-cost prices), and sale of domestic crude oil by stated owned upstream oil and gas companies viz. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), etc. at a discounted price to these fuel refiners-cum-retailers.
In June 2010, petrol was decontrolled followed by diesel in November 2014. As for LPG, the Kelkar Committee recommended the removal of 25 per cent of the subsidy in 2012-13 and 75 per cent in the following two years. Modi Government which took charge in May 2014, started acting on it but in a calibrated manner. On January 1, 2015, it launched a direct benefit transfer (DBT) of subsidy. Under DBT, oil PSUs deliver the cylinder to the beneficiaries at a full cost-based price and follow it up by depositing a subsidy in the beneficiary’s account.
In turn, they claim reimbursement of the subsidy amount from the Centre. This helped in eliminating fake beneficiaries and curbing misuse that was inherent in the erstwhile system wherein subsidy was embedded in the price. But, the government couldn’t muster the courage to trim the number of beneficiary HHs sans Modi requesting the rich to give up on their own.
The FY 2020-21 was a boon, viewed from a subsidy angle. In that year, there was a steep decline in international prices (due to the COVID-19 pandemic) leading to a fall in the cost of supplying an LPG cylinder to a low of Rs 600; hence, it could be given to all HHs at Rs 600 requiring no subsidy support. The BE of Rs 36,000 crore for that year was used largely to clear past dues of oil PSUs and provide free gas connections under the Pradhan Mantri Ujjwala Yojana (PMUY).During 2021-22 when the international price rose due to waning COVID and demand revival, the cost of LPG zoomed to over Rs 900 per cylinder.
This prompted the government to give subsidies but only to the PMUY beneficiaries. They were 9.6 crore out of a total of 33 crore HHs. It spent Rs 14,000 crore during that year. During 2022-23, it spent Rs 9,170 crore. But, this doesn’t tell the full story. From June 2020 to June 2022, the government had asked the three fuel retailers namely IOCL/BPCL/HPCL to sell LPG at a price below cost and gave them a one-time grant of Rs 22,000 crore to compensate for the losses incurred in 2021-22 and 2022-23 (against under-recovery of Rs 28,250 crore).
This was nothing but subsidy (albeit ‘hidden’) given to all and sundry, and not just PMUY beneficiaries. In the Budget for 2023-24, it kept the BE for LPG subsidy at Rs 2,257 crore. As in the previous two years, that allocation was meant to cover subsidy to PMUY beneficiary HHs @ Rs 200 per cylinder for up to 12 refills per year. However, to benefit all the 33 crore HHs, on August 29, 2023, the Union Cabinet approved a reduction in the price by Rs 200 per cylinder effective from August 30, 2023, thereby enabling the PSU retailers to sell it at Rs 903 per cylinder (Delhi). Taking 4 fills per HH, @Rs 200 per cylinder, the annual burden comes to Rs 26,400 crore (200x4x33).
Since the decision was effective from August 30, 2023, for the remaining seven months of FY 2023-24, the outgo would be around Rs 15,300 crore. On March 9, 2024, the fuel retailers namely IOCL/BPCL/HPCL were asked to cut the price by another Rs 100 per cylinder (courtesy, of general elections) to Rs 803.
During the current FY 2024-25, the price has remained unchanged despite the cost remaining at an elevated level. The under-recovery for 2023-24 and 2024-25 thus comes to over Rs 40,000 crore of which the Centre now wants to reimburse Rs 35,000 crore. This and the earlier payment of Rs 22,000 crore for loss incurred by IOCL/BPCL/HPCL during 2021-22 and 2022-23 could have been avoided if only it had stuck to its earlier stance of restricting LPG subsidy only to the poor HHs and keeping it transparent. But, this is unthinkable in the current political climate wherein all decisions based on sound economic logic are hamstrung by populism.
(The writer is a policy analyst; views are personal)
