Govt’s Rs 22,000 cr grant falls short of filling LPG losses, bigger worries on petrol, diesel linger | The Financial Express

Govt’s Rs 22,000 cr grant falls short of filling LPG losses, bigger worries on petrol, diesel linger

Unlike the consumer LPG prices, which are regulated by the government, petrol and diesel are deregulated, with the OMCs having the freedom to change prices based on the international costs. However, despite the international oil prices shooting up, the OMCs did not tamper with the rates since April this year.

Govt’s Rs 22,000 cr grant falls short of filling LPG losses, bigger worries on petrol, diesel linger
The central government stopped the cash subsidy scheme for LPG cylinders from May 2020, seeing the prices of LPG dropping significantly post the outbreak of COVID-19. The centre did not reintroduce the scheme since then, even though the prices started to increase from June, the same year. Image: PTI

The government’s one-time grant of Rs 22,000 crore to PSU firms Indian Oil, HPCL and BPCL to compensate for LPG losses solves only a part of the problem, while petrol and diesel under-recoveries pose a bigger worry. The compensation approved by the Union Cabinet this week falls short against an estimated revenue loss of over Rs 48,000 crore on sale of domestic liquified petroleum gas during June 2020-June 2022, Kotak Institutional Equities said in a note. The Cabinet’s muted response for dealing with the under-recoveries of petrol and diesel, revenue loss on which is estimated to be over Rs 80,000 crore in the first half of this fiscal, is another factor raising concern, Kotak analysts said.

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International LPG prices rise, India prices stay put

The one-time grant comes amid international LPG rates rising more than 300 per cent from June 2020-June 2022. The OMCs absorbed the cost pressure keeping the domestic consumers immune to the cost increase. On the domestic level, the OMCs increased the price of 14.2 kilogram LPG cylinder by roughly 72 per cent from Rs 582 per cylinder to Rs 1,003 per cylinder during the period May 2020-June 2022. In addition to this, the central government stopped the cash subsidy scheme for LPG cylinders from May 2020, seeing the prices of LPG dropping significantly post the outbreak of COVID-19. The centre did not reintroduce the scheme since then, even though the prices started to increase from June, the same year.

LPG under-recovery math

A combination of domestic immunity from cost increases and the absence of cash subsidy since June 2020 led to OMCs losing Rs 48,400 crore, as of first half of this current fiscal. Kotak analysts estimate the loss in Q2FY23 alone to be Rs 5,500 crore. Hence, the one-time grant may not fully heal the cost pressure-induced wounds incurred by the OMCs but it is still a positive impact. The losses are expected to be negligible from Q3FY23. A bigger worry umbrellas the losses induced by petrol and diesel. The under-recoveries on petrol and diesel is estimated at Rs 81,800 crore.

Why Indian oil companies did not raise LPG prices

Unlike the consumer LPG prices, which are regulated by the government, petrol and diesel are deregulated, with the OMCs having the freedom to change prices based on the international costs. However, despite the international oil prices shooting up, the OMCs did not tamper with the rates since April this year. This has resulted in the accumulation of large losses, compensating for which, can be an onerous task for the government. “Further, even if there is a willingness to compensate, it will be difficult to justify the compensation for fuels which are deregulated and prices are market determined. The situation will also be trickier as even private marketing companies have likely incurred some losses on these products, in our view,” Kotak analysts added.

Also Read: Inflation above RBI’s comfort zone for three full quarters; brace for 35-50 bps rate hike by MPC, say analysts

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First published on: 13-10-2022 at 02:55:01 pm
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