Centre's LPG subsidy bill likely to be lower next year, say experts

The government’s liquefied petroleum gas (LPG) subsidy bill for the next financial year (FY22) is expected to be much lower than previous years, say experts. This is because crude oil price is expected to remain soft, and the price of domestic (14.2 kg) LPG cylinders is likely to be kept high.

“The under-recovery (difference between subsidised price and actual price) for 2021-2022 is estimated at Rs 1,500 crore at an average Indian crude basket price of $60 a barrel and exchange rate of Rs 76 per US dollar. The subsidy allocation was Rs 38,822 crore in 2020-2021,” Prashant Vasisht, vice-president and co-head of corporate ratings at ICRA, told Business Standard.

Rucha Ranadive, economist at CARE Ratings, said: “Owing to the expectations of subdued crude oil prices globally, the upward pressure on petroleum products could be limited in FY22 as well. This will lower the subsidy burden of the Centre.”

The steep fall in crude oil prices coupled with a gradual rise in the price of subsidised domestic LPG cylinders had brought relief to the Centre this year.

“Allocation for the LPG subsidy could be around 10-15 per cent lower than the Budget Estimate of Rs 37,256 crore for 2020-2021. LPG subsidy accounts for nearly 90 per cent of the petroleum subsidy. During April-October 2020, the outgo towards petroleum subsidy is only 47 per cent of the BE for 2020-2021. As such, in the Revised Estimates of 2020-2021, the subsidy expenditure could be much lower than what was budgeted for,” Ranadive said.

“This lower subsidy burden will help the government reallocate the expenditure towards sectors like health care, which is a focus area in this pandemic situation, as well as the infrastructure sector that is pertinent from the economic growth perspective,” she added. The price of a subsidised domestic LPG cylinder has been hiked by nearly Rs 100 per cylinder over multiple installments between July 2019 and July 2020 — from around Rs 494.35 a cylinder to Rs 594.

The price has been maintained at this level for the rest of 2020. The price of an unsubsidised domestic cylinder was Rs 595 a cylinder for the most of 2020 in the national capital. This was hiked to Rs 644.00 a cylinder this month.

To offer enhanced relief for the economically weaker section, the Centre offered free LPG cylinders to 80 million Pradhan Mantri Ujjwala Yojana (PMUY) beneficiaries. These three free cylinders were offered during the Covid-19 pandemic lockdown months. This cost the exchequer around Rs 10,000 crore this year. Experts had mixed views on whether this support would be extended next year. According to Ranadive, this may be expected as the government has been trying to increase the outreach under the scheme.

But going by Vasisht’s assessment, it would not be extended.

“The completely free LPG cylinders were given as a one-time Covid-19 relief. The subsidy for these will be accounted for in 2020-2021. These are not expected to be given again in 2021-2022. However, the subsidy to provide three free LPG cylinders for PMUY beneficiaries would be about Rs 17,000 crore in 2021-2022 (if extended).”