Quiet decontrol of LPG: 2021-22 to bring the curtain down on budgetary fuel subsidy

By: and |
August 09, 2021 4:00 AM

Prices of LPG in the country are based on international benchmark prices, which had risen from $359/tonne in October, 2020 to $607/tonne in April, 2021. India imports more than 55% of its LPG requirement. The weightage of LPG in the wholesale price index is 0.64%.

These steps helped the government save nearly Rs 71,301 crore cumulatively till March 31, 2020.These steps helped the government save nearly Rs 71,301 crore cumulatively till March 31, 2020.

The Centre’s Budget will likely be completely freed from the burden of fuel subsidy in the current fiscal year, marking an end to a sticky and politically sensitive item of revenue expenditure it struggled long to get rid of. One of three major explicit subsidies financed out of the Budget, via oil bonds and by state-owned upstream oil companies, the budgetary fuel subsidy peaked at close to Rs 1 lakh crore in 2012-13. The process of ending the fuel subsidy began with the decontrol of retail petrol prices by the UPA-II government in June, 2010; the same government also kick-started the deregulation of diesel prices in January, 2013 via incremental monthly price increases of 50 paise/litre, a process which was completed by the Narendra Modi 1.0 government by October, 2014. While the subsidy on kerosene (used for lighting) was negligible since FY15, the only item that continued under the subsidy regime thereafter was cooking gas.

Since June 2020, the government hasn’t been depositing the subsidy on LPG or cooking gas in the bank accounts of target beneficiaries. A drop in global crude oil prices (hence the global LPG product prices) since May 2020 gave the government an opportunity to withdraw the LPG subsidy. The end-consumers had not felt the pinch till November 2020 thanks to muted global LPG prices; even without subsidies domestic LPG cylinders used to cost just around Rs 600, close to the price at which the subsidy kicked in. As the global prices have since risen, the government did not reinstate the subsidy. The decision to end the subsidy was taken and implemented quietly; there wasn’t any official announcement of the same.

As global rates started rising, the retail price sans subsidy of domestic LPG cylinder crossed the Rs 700-mark in February 2021, and surpassed Rs 800 in May, impelling a large section of low-income users not to refill the cylinders. Of the eight crore beneficiaries under the Pradhan Mantri Ujjwala Yojana (PMUY) scheme, 3.2 crore did not refill their LPG cylinders in the first quarter of FY22. The dip in usage is because the end-price of the standard 14.2-kg cylinder has risen 43.3% since May, 2020.

LPG subsidy rationalisation started with Direct Benefit Transfer of LPG (DBTL) or PAHAL scheme launched on June 1, 2013; the scheme covered all consumers by January 1, 2015. DBT-PAHAL helped in weeding out 4.49 crore duplicate, fake/ non-existent, inactive LPG connections. In addition, 1.08 crore consumers gave up their subsidy under ‘GiveItUP’ campaign. Effective January 1, 2015, the government stopped subsidy on LPG for people who reported taxable income of Rs 10 lakh and above during the previous financial year. These steps helped the government save nearly Rs 71,301 crore cumulatively till March 31, 2020.

The Centre’s Budget Estimate (BE) for LPG subsidy in FY22 is Rs 14,073 crore; this compares with Rs 36,178 crore spent in FY21. The LPG subsidy in FY21 consisted of Rs 25,520 crore spent on PAHAL and Rs 9,690 crore towards giving first LPG connection to poor households free of cost under PMUY. Given that the PAHAL scheme virtually ceased to exit from June last year, the LPG subsidy budget this year would be a few hundred crores being spent as freight subsidy for consumers in far-flung areas like parts of the Northeast.

The BE for PAHAL in FY22 is Rs 12,480 crore. No amount has been earmarked for providing connections to poor households under the Pradhan Mantri Ujjwala Yojana (PMUY). Under PMUY launched in May 2016, the government pays Rs 1,600/user to oil marketing companies (OMCs) to cover the cost of providing connections and cylinders to the first-time LPG users. OMCs also provides interest-free loans to PMUY beneficiaries to cover the cost of first refill. The loan amount is to be recovered from the subsidy amount payable by the government to the customers on each refill.

Prices of LPG in the country are based on international benchmark prices, which had risen from $359/tonne in October, 2020 to $607/tonne in April, 2021. India imports more than 55% of its LPG requirement. The weightage of LPG in the wholesale price index is 0.64%.

Meanwhile, OMCs have found significant increase in credit risk in PMUY loans. For Indian Oil (IOCL), out of the PMUY consumers loans of Rs 3,023 crore, as much as Rs 910 crore has been categorised as ‘doubtful’ as at FY21-end, given the incidence of beneficiaries who have not refilled the cylinders for more than 12 months. Hindustan Petroleum has created a provision of impairment for Rs 618 crore till March, 2021 against the loans of Rs 1,882 crore extended to PMUY consumers. It is not immediately clear how OMCs seek to recover the loan amounts, given that the subsidy withdrawal means the stressed loans will only rise.

Minister of state of the petroleum and natural gas Rameswar Teli said in Parliament recently that as many as 7.9 crore PMUY consumers had refilled their LPG cylinders in FY21. The beneficiaries refilled 3.01 cylinders on an average in FY20, and their average consumption had increased 44% annually in FY21. The rise in consumption last fiscal was due to the benefit provided to PMUY users under the Pradhan Mantri Garib Kalyan Yojana, wherein cost of LPG cylinder refills were paid in advance to the bank accounts of beneficiaries during Covid-19 lockdowns in 2020. As many as 14.2 crore free cylinders were distributed free of cost to the PMUY beneficiaries during April-December, 2020 under this package, which cost around Rs 12,000 crore (advances were transferred by oil marketing companies to PMUY beneficiary bank accounts).

While the government intends to use the resources freed up from fuel subsidy removal for productive purposes such as capital expenditure, this plan is being thwarted as there has been a simultaneous increase in food subsidies from FY17 onwards, thanks to the National Food Security Act and the relief measures like the free-grains scheme unveiled post the pandemic. Even though the initial Budget estimates of food subsidy remained around Rs 1 lakh crore in these years, the actual expenditure was substantially higher. The government arranged funds from the National Small Savings Fund (NSSF) to bridge the gap.

The Budget spending on food subsidy was a massive Rs 5.25 lakh crore in FY21, thanks to the fact that off-budget funding via NSSF (about Rs 2.4 lakh crore) was brought into the Budget and the free-grains scheme (which cost Rs 1.3 lakh crore) implemented to give Covid relief to people.

Of course, the food subsidy will continue to remain high and could be around Rs 2.8 lakh crore in FY22 as the government is implementing free grains scheme for May-November at an estimate cost nearly Rs 1 lakh crore. Fertiliser subsidy, which has remained around Rs 70,000 crore/year for the last one decade, rose 58% on year to Rs 1.28 lakh crore in FY21 as the government cleared arrears. Fertiliser subsidy is estimated to cost about 95,000 crore to the government in FY22.

Fuel subsidies declined from 0.97% of GDP in FY13 to 0.18% in FY21. In the same period, the food subsidy rose from 0.85% of GDP to 2.7% while fertiliser subsidy remained unchanged around 0.65% of GDP.

While the government may not be able to reduce food subsidy burden due to the National Food Security Act, which mandates the government to give highly subsidised food grains to some 80 crore people, DBT is being mulled for fertiliser subsidy to reduce the fiscal cost.

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