India removes LPG subsidy for low-income households

The Indian government has removed LPG subsidies for poor households in its budget for the April 2023-March 2024 fiscal year, defying market expectations of an extension because of state and general elections in 2023-2024.

The removal of the subsidy compares with an 80bn rupee ($974mn) allocation for the April 2022-March 2023 fiscal year.

Efficient implementation of the government's Pradhan Mantri Ujjwala Yojana (PMUY) scheme for low-income households has led to 96mn LPG connections in the country since its adoption in 2014, finance minister Nirmala Sitharaman said while presenting the budget for the 2023-24 fiscal year on 1 February. The scheme incentivises poorer, rural homes to transition to LPG for cooking from solid biomass fuels by subsidising the cost of the equipment.

The success of the PMUY scheme is likely to have resulted in demand saturation with almost every low-income, rural household now connected to LPG, potentially prompting the subsidy removal.

The removal of the subsidy belied market expectations that the government would extend its Rs200 ($2.50) subsidy for a 14.2kg cylinder announced in May 2022 for another year because of crucial state elections scheduled for this year and a general election in 2024. The government had provided Rs200/cylinder subsidy for up to 12 cylinders to ease the burden of rising gas prices on the beneficiaries of PMUY.

But the government doubled the LPG subsidy for India's northeast region to Rs16.33bn from the 2022-23 fiscal year. The sharp rise in the subsidy can be attributed to the fact that the region has the lowest LPG coverage in India so far. Upcoming state elections in Meghalaya, Nagaland, and Tripura in March and Mizoram, Sikkim and Arunachal Pradesh later this year could be another reason for the higher subsidy.

India's LPG consumption will grow by 1.5-2pc in 2023 , state-controlled refiner IOC told Argus last month. This was backed up by similar forecasts from Indian companies Crisil, Icra and Antique Broking.

Direct benefit transfer subsidy unchanged The government has left unchanged its budget allocation for LPG subsidies under the direct benefit transfer (DBT) programme at Rs1.8bn for 2023-24, raising the risk of global price volatility for state-controlled oil marketing companies (OMCs) that set LPG prices in India.

DBT is a government programme aimed at improving subsidy administration across the country.

"The budgetary allocation for DBT on LPG [domestic] sales is low at Rs180 crore (Rs1.8bn) which would be a risk for PSU [public sector undertaking] OMCs in case international crude oil or LPG prices rise," Mumbai-based credit ratings agency Icra vice-president Prashant Vasisht said.

Elevated crude oil prices last year on the back of the Russia-Ukraine conflict had led to a sharp rise in LPG prices globally. But the Indian government has tried to keep retail LPG prices stable in the country, mainly to support a switch away from solid biomass fuels.

Indian OMCs have kept prices of 19kg commercial LPG cylinders unchanged since January. A 19kg commercial LPG cylinder cost Rs1,769 in Delhi, Rs1,721 in Mumbai, Rs1,870 in Kolkata and Rs1,917 in Chennai on 1 February, according to IOC. Commercial LPG cylinders are mostly used for cooking in canteens, offices, colleges, schools, hospitals, restaurants and hotels.

Prices of 14.2kg residential LPG cylinders have been left unchanged since July. A 14.2kg residential LPG cylinder cost Rs1,053 in Delhi, Rs1,053 in Mumbai, Rs1,079 in Kolkata and Rs1,069 in Chennai on 1 February, IOC added.

The average price of a residential cylinder rose by 21pc on the year to Rs994 in 2022, while that of a commercial cylinder rose by 25pc to Rs2,093.

The government has separately announced that it will provide capital support of Rs300bn to state-controlled refiners in 2023-24 to compensate them for the losses made from selling fuel at lower prices. The support came after the government paid Rs220bn in compensation to state-controlled refiners last year for selling auto fuel and LPG at below market prices to stem a rise in retail fuel prices.

By Rituparna Ghosh

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