Sharp Increase in LPG Prices - Background Context
The prices of LPG, which are revised and corrected every month, witnessed a sharp increase. The changes were as such …
Unsubsidised LPG Cylinder
Unsubsidised LPG Cylinder
Unsubsidised LPG Cylinder
Unsubsidised LPG Cylinder
Liquified Petroleum Gas (LPG) and the Indian Economy
Liquefied Petroleum Gas (LPG) is an integral and essential commodity of every household in India and thus the identified part of the budget at home. Any fluctuation in the prices of an LPG unit (14.2 kg cylinder) greatly influences the monthly budget of an Indian family. The day-to-day customary usage of LPG is for everyday cooking meals both domestic and commercial.
However recent changes in automobiles, not to mention, LPG is routinely employed for running locomotives (vehicles) and also for refrigeration etc. LPG which is the combination of gases (hydrocarbon) is one among the series of products extracted after purifying (refining) crude oil (i.e. petroleum). Moreover, the major portion of the crude oil made available in India is imported from other countries.
Market movers and Regular Influencers of LPG in India
Prices of LPG are calculated based on the standard formula popularly known as Import Parity Price (IPP), the inputs to IPP are the real-time international prices of LPG. SAUDI ARAMCO, the world's largest crude oil producer acts as the standard basis for IPP. These prices from SAUDI ARAMCO are inclusive of customs duties, ocean transportation and freight, free-on-board price, etc.
These prices are internationally dominated in dollars and firstly they are converted to domestic prices and it is from here the overhead costs get added, these are local transportation, containers chargers (storage), the mark-up for oil marketing firms, marketing costs, dealers and agent corporations, and lastly the GST.
At the end of this government reaches the actual LPG prices (selling price). The prices of LPG are revised and corrected every month; the decision is directly proportional to the international prices and unfortunately, the rupee decided to go against the dollar in the preceding weeks.
Individual and Self-Selection of DBT for LPG
Even after 74 years of Independence, India still has a mass population with lower wages and may not afford the LPG at the international market prices. Hence the government devised the scheme of Direct Benefit Transfer (DBT), which aims to transfer cash directly to the beneficiary’s bank account.
DBT is well implemented for LPG for millions of Indians. Before the implementation of DBT, the LPG was distributed (sold) to Indian masses at subsidised cost through the channel of Public Sector Oil Marketing organizations (private companies were not allowed to enter the LPG market), this resulted in the black marketing of LPG, corruption in Public Service organization and rerouting of low-priced LPG barrels or cylinder to favoured commercial, industrial and automobile industrial segment.
The government’s provision of DBT to the beneficiary is an approach to curb the public sector corruption and the amount poured by the government to subdue the cost of the petroleum is forwarded to the consumer, thus the prices of the product (LPG) are decided by the market forces.
DBT is a different way of giving the subsidy to the end consumer, contrary to the general perception or consciousness, thinking of DBT as withdrawal or expulsion of subsidy.
- DBT safeguards, the interest of the genuine domestic consumer.
- DBT eliminates any chances of benefit diversion to favoured parties.
- DBT saves taxpayers and public money.
- DBT avoids uniform coverage (wastage of money) by letting self-selection.
- Ceiling/Restraining the prices of LPG, led to the bend in production and distribution.
- DBT aims to revise the unforeseen stress in the petroleum (LPG) industry.
The recent behaviour of International Prices
The Crude oil price ran an uptrend marathon and surpassed the $68 level in December. It managed to reach a higher level and topped at $68.91 in early January, but with the infamous coronavirus (COVID-19) disease hovering, lurking and making its is to the headlines in recent news, the threat of a worldwide slowdown, had plummeted the crude oil prices down through January, with few 50% retracement spikes.
Saudi Aramco decided to increase its propane gas prices from $440/metric tonne (in December) to sharply the new high of $565/metric tonne (in January). Prices of propane from Saudi Aramco offer a standard criterion for revising or correcting the pricing of the LPG sales to Asia.
Coincidently the rupees against the dollar have been performing consistently within the bracket of ₹71-₹72/$1.00, having broadly surpassed the ₹72/$1.00 level in early January.
Who will the Price increase influence?
The price increase will greatly influence retail customers who decided to stay away from the LPG subsidy. The government mentions, that for those who opted to receive a subsidy, the further potential rise would be mostly occupied and consumed by the increase in subsidy.
The Centre says the cost of nonsubsidised containers (LPG cylinder – 14.2 kg) is likely to arise from the existing ₹714.00 to a new high of ₹858.50 in the national capital Delhi. For instance, the difference in increase for the subsidy offered might arise from the existing ₹153.86 to ₹291.48, considering this, it is worth mentioning here that out of 270.7 million (27.76 crores) retail customers, 260.12 million (26.12 crores) consumers take advantage of the LPG subsidy.
Similarly, for the scheme titled “Ujjwala”, the subsidy for the consumer might witness an increase from ₹174.86 to ₹312.48 per LPG cylinder.
Open Pricing Sovereignty for Government
Earlier to the newest round of the price rise, the government had already made an increased LPG cylinder costs by ₹62 (August 2019). Collating this with the price rise of ₹82 that had been consistent over five years to mid-2019, hinting a preference for increasingly minimum subsidy. In the latest increase, the Centre pursues to soak up much of the rise for those benefiting from subsidies. It seems, the latest increase went beyond the control of the centre and thus, the government raising the bar of subsidy levels to safeguard LPG consumers, considering the fact, that the Indian economy is tottering from insufficiency in consumer spending.
- Dismantle the Subsidy System for Better India
- There are certain demerits of the subsidised LPG cylinders to Indian masses and put a lot of financial stress on the tottering economy.
- Each and every LPG cylinder circulated in India carries the burden of subsidy.
- This boils down to notable pressure on the government and its establishments.
- Thankfully, many Indian decide not to be listed for subsidy and rather pay the full price of LPG cylinder, this is no less than a direct contribution towards national development.
- In response, the government initiated the #GiveItUp campaign, primarily aimed at encouraging LPG consumers to pay the full price at market cost and give up their LPG subsidy.
Situations whenever the consumer demands for market goods, products and services offered in the country collapse, then disposing more cash to consumers may again regain the overall consumer spending.
However, the recent increase in LPG prices is contrary and unwelcomed by the LPG consumers. Such price increase actually puts more pressure on consumers who decide to pay full price or cost for the LPG cylinder.
As a result, a well-planned monthly budget of Indian households automatically goes up, and ironically for those who decided to pay the full cost of the LPG cylinder.