Subsidy on LPG

Liquefied Petroleum Gas (LPG) is a sensitive subject with the people, as it directly affects their lives and their monthly budget. All successive governments have had to continue and increase subsidies due to political compulsions and override sane advice from economists, to cut and ultimately remove the subsidies on LPG.

So what is LPG?

Propane or Butane gas commonly referred to as LPG, is a flammable mixture of hydrocarbon gases. It is prepared by refining crude oil (petroleum) or extracted from petroleum or natural gas streams. Globally, LPG is used for cooking, in automobiles, in rural area heating, and refrigeration industry.

In India LPG is mainly used for cooking while the automobile industry is also a user though the volumes are smaller.

Natural Gas & LPG: impact on economy

It needs to be understood that LPG is different from Natural Gas and its applications vary. Natural gas is used as an input to run power plants, machinery etc, while LPG is used mainly in the domestic homes and restaurants. The pricing policy for both has been under much debate.

Take natural gas, with heavy investments made in the sector by both the government controlled companies like ONGC and private sector companies like Reliance Industries, India has made some significant discoveries of natural gas reserves. This in turn has reduced the need for imports and resulted in saving precious foreign exchange.

The current controversy relates to the pricing of natural gas. On the basis of recommendations of the Rangarajan Committee, the UPA led government had recommended a hike in the price of gas produced from KG-D6 block, from $4.2 per unit to $8.40 per unit. The price hike would have been implemented by now but the Election Commission stepped in and postponed the decision to post elections. The present government is now to take up the issue.

The doubling of the price of gas will certainly have a cascading effect on the prices of power, cement, iron & steel, aluminum etc which in turn will raise the cost of all items that use these as raw materials, thereby giving inflation a rise. Under the scenario where the government is trying hard to control inflation, a raise in gas prices to the level recommended, can ruin all plans of the government to kick start the economy in the short term.

This said, it is also critical that the government reduce the subsidy on all petroleum products, which is a major drain on the economy. According to an Expert Panel Report of the government submitted in 2013, the total under recovery on account of subsidy of petroleum products was Rs 161,029 crore for FY12-13. This is a significant amount for any government to deal with. The balancing act between economic prudence and political populism will be a major challenge.

The coming weeks will give an indicator on how the government plans to tackle the pricing issue. Both ONGC and Reliance Industries have said that unless the prices are increased to the recommended levels, future investments in the sector could come down. The problem is compounded by the fact that only one block is producing gas and that too has come down from the earlier projected levels. India needs to discover more viable sources and unless major investments are made in the sector, we will continue to spend our precious foreign exchange in importing gas.

The other segment under controversy is the LPG pricing and distribution. The government has been distributing LPG through cylinders for domestic cooking and also to restaurants for commercial cooking. The problem lies in the subsidy of LPG Cylinder. Against an average market price of Rs 905 for a 14.2 kg cylinder, the government was charging a subsidized rate of only Rs 411.

The UPA government introduced the Aadhaar scheme as a means to ensure that cash compensation in lieu of subsidy across goods and services, can be made to the end consumers through direct payments to their bank accounts. The Direct Benefit Transfer of LPG (DBTL) launched from June 01, 2013 in 291 districts, wherein the cash differential between market and subsidized price was transferred directly into the account of Aadhaar Card holders.

Over Rs 5,400 crore was transferred to over 2.8 crore consumers. The scheme was appreciated by users but there were problems that came up. Due to lack of banking facilities in rural and remote areas, opening a bank account was a problem. The lack of adequate branches also meant that rural, illiterate villagers had to reach a bank first and then deal with the challenge of opening and operating a bank account. Lack of Payment withdrawal facilities like ATMs etc was another issue. With several complaints relating to these coming up, the government was forced to suspend the scheme.

The government appointed a panel headed by Prof Kapur of IIT Kanpur to review the DBTL. The panel accepted that broadly the scheme was good and viable to proceed for further expansion but recommended that a study be conducted for three months, prior to the scheme renewal, that will look into building awareness of the scheme and its benefits, enrollment of consumers under the Aadhaar scheme and listing it for LPG subsidy transfer. The panel also recommended inclusion of Post Offices and other agencies like co-operative banks for improving access points for rural consumers. The committee further recommended reducing VAT on LPG.

It’s now for the new government to take a call on pricing policy related to natural gas, as well as taking forward the DBTL scheme across the country.

Related information:

Union Budget Expectations 2014-15

Food Adulteration in India

Black Money in India

Pahal Scheme