LPG deregulation is next: consumer may get fixed subsidy; prices will change monthly

After diesel, it appears that cooking gas sold in cylinders will be the next petro-fuel to be deregulated.

Deregulation does not mean no subsidies to the consumer; it only means that final consumer prices will move according to global crude price trends. Final prices at the consumer end will move just like that of petrol and, now, diesel.

This is a key interpretation that follows from the Modi government’s decision the other day to shift LPG cylinder subsidies to the direct cash transfer route - which means the difference between the market price and the actual price to the consumer is paid into consumer bank accounts. The consumer will thus have to pay the full market price when she buys the cylinder and use the subsidy paid into the bank account to make up for the higher price.

Currently, consumers get 12 subsidised cylinders every year. Since the price of each subsidised cylinder is fixed and the price of crude varies daily, it means that the actual subsidy paid to consumers varies from time to time.

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The shift to direct cash transfers will mean that the government will either have to adopt the complicated route of paying different amounts of subsidies into crores of bank accounts as crude prices change, or opt for a fixed subsidy on each cylinder, with the consumer paying ever-changing market prices.

A Business Standard interview with Petroleum Minister Dharmendra Pradhan hints that this is exactly what might happen - deregulation of LPG prices and fixed cylinder subsidies. He told the newspaper: “The cap on cylinders will be the same, but the deliverable price will change. Till now, the price was the same, but subsidy used to change.”

Translated, this means the government will fix the level of subsidy, and let consumer bear the brunt (or obtain the gains) from global crude price trends.

*According to the Petroleum Planning and Analysis Cell in the petroleum ministry, last year LPG was subsidised to the extent of Rs 46,400 crore. A 14.2 kg LPG cylinder is sold at almost half the cost between Rs 414 (in Delhi) and Rs 448.50 (in Mumbai). The non-subsidised price in Mumbai is Rs 926.50 and Rs 901 in Delhi. This means the subsidy element is currently around Rs 478 in Mumbai and Rs 487 in Delhi.

Once direct cash transfer becomes the norm, the government will probably shift to a fixed subsidy - say, Rs 450-480 for various cities - which will then be paid into bank accounts. The consumer will pay the market price, which will vary from month to month.

As things stand, the subsidy is currently paid out in three parts, according to a report in BusinessLine: Rs 22.58 per cylinder comes directly from the centre; the balance comes from the oil and gas producing companies (ONGC, Gail, Oil India) and a final payment from the centre to the oil marketing companies (Indian Oil, HPCL and BPCL) every quarter, based on calculations of under-recoveries.

But a shift to direct cash transfers will make this three-part payment of subsidy cumbersome since the payments will be made not to three marketing companies, but crores of consumers every month (or every quarter). Estimates of the number of gas connections vary from nine crore to 16 crore - which suggests the level of benami connections that may be in existence. Direct cash transfer will cut this gap and bring down the actual number of people entitled to subsidies.

The stage has been set for LPG deregulation and fixed cylinder subsidies.