By Prashant Vasisht
The Iran war has disrupted LPG shipments through the Strait of Hormuz, a key energy chokepoint, pushing up global LPG prices. Despite the hike in domestic LPG cylinder prices and government subsidies, the under-recoveries of oil marketing companies are likely to increase, writes Prashant Vasisht
LPG production and consumption in India
India’s liquified petroleum gas or LPG consumption was 31.3 million tonne in FY25, of which 12.8 million tonne is produced domestically, accounting for 40% of total consumption. Domestic production has remained at similar levels over the last few years, while consumption in India witnessed significant growth in the last decade owing to the government’s Pradhan Mantri Ujjwala Yojana scheme (PMUY), which increased LPG connections among below-poverty-line (BPL) families.
How current supply constraint is being addressed
Around 90% of India’s LPG imports originate in West Asia, primarily Saudi Arabia, Qatar and the UAE. Nearly 90% of these is routed through the Strait of Hormuz (SoH), which is virtually closed due to the conflict in West Asia. India is in talks with Iran to secure safe passage for around 10 LPG tankers, and two tankers have safely crossed the SoH in the last two days.
It is also scouting additional LPG cargoes from suppliers beyond West Asia. Domestic product-ion is being increased by refining companies by tweaking the product slate to maximise LPG production. Refineries have been directed not to divert propane and butane for petrochemicals production. The sale of LPG to commercial establishments is being restricted.
What is the consumption mix in India?
The domestic segment accounts for 88% of the consumption mix, followed by commercial / industrial (11%) and transportation (<1%). The cost of LPG is deter-mined on import parity basis using Saudi Contract Price and other charges such as ocean freight, bottling, inland freight, etc.
The total number of domestic LPG connections is 330 million, of which 103 million are PMUY beneficiaries. In FY25, PMUY beneficiaries consumed an average of 4.5 cylinders per beneficiary per year, while non-PMUY consumers averaged 6.6 cylinders per beneficiary per year.
Domestic price trends
The oil marketing companies (OMC) hiked domestic LPG cylinder prices by Rs 60 per 14.2 kg cylinder from March 7, 2026 increasing the retail price to Rs 913 per cylinder in Delhi. The previous price increase was on April 9, 2025 when the prices were increased by Rs 50 a cylinder. The subsidy for PMUY beneficiaries is Rs 300/ cylinder leading to an effective price of Rs 613/ cylinder for the consumer.
OMCs’ LPG under-recoveries
The LPG under-recovery burden for OMCs was Rs 50,600 crore on December 31, 2025 owing to high international prices of LPG and lower realisations on sales. This is set to go up further given the recent hike in international LPG prices, despite the upward revision in domestic cylinder prices and support by the government.
The government had approved a `30,000-crore compensation package for the OMCs in August 2025. The grant is being released in 12 equal monthly tranches, with the first tranche disbursed in November 2025.
PMUY subsidy burden on govt
The PMUY subsidy burden has been rising over the years with an estimated burden of ~ Rs12,700 crore in FY26, driven by the growth in both the number of beneficiaries and per capita LPG consumption.
PMUY connections rose to 10.3 crore in FY25 from 80 million in FY20 and average consumption grew to 4.5 cylinders/ beneficiary/ year from 3 cylinders/ beneficiary/ year during the same period. The government also raised the subsidy to Rs 300/ cylinder in October 2023 from Rs 200/ cylinder, adding to the subsidy burden.
Impact on OMCs’ profitability
If crude oil prices remain elevated and retail prices of auto fuels are not revised, the marketing margins of OMCs are likely to come under pressure, adversely impacting overall profitability. Also, despite some improvement in gross refining margins,the continued burden of sizeable LPG under-recoveries will further weigh on earnings.
The writer is senior vice president and co-group head, Corporate Ratings, Icra
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.