LPG: The new diesel?

Nearly half the FY15 petroleum subsidy to be accounted for by cooking gas

The phased diesel price decontrol, initiated in January 2013, has started showing results, with underrecoveries on liquefied petroleum gas (LPG) sales expected to exceed those on diesel this financial year.

In 2012-13, subsidised LPG accounted for 24 per cent (Rs 39,558 crore) of oil marketing companies’ total underrecoveries of Rs 161,000 crore on the sale of diesel, LPG and kerosene. The share rose to 33 per cent in 2013-14 and is likely to further increase to 47 per cent of total estimated underrecoveries of Rs 1,04,500 crore this financial year. The rise is attributed to steady retail LPG prices, the recent rise in the cap on subsidised cylinders to 12 a year and the delay in rolling out the Direct Benefits Transfer programme in LPG distribution.

The fact that LPG underrecoveries have become a concern in petroleum subsidy reforms masks the benefits accruing from the fall in underrecoveries on the sale of subsidised diesel, owing to sustained monthly price increases of 50 paise/litre since January 2013. The contribution of diesel to the losses of oil marketing companies fell from 57 per cent (Rs 92,061 crore) of the total underrecoveries in 2012-13 to 44 per cent in 2013-14. It is felt that this financial year, the share will drop to 24 per cent.

The last time diesel underrecoveries, as percentage of total underrecoveries, fell below the share of LPG was 2009-10. That year, subsidised diesel accounted for 23 per cent (Rs 9,279 crore) of the total underrecoveries, against LPG’s 35 per cent (Rs 14,257 crore).

The share of kerosene has largely remained between 20 per cent and 30 per cent as the government cuts the quota of Public Distribution System kerosene in line with the increasing penetration of cooking gas.

  Despite the fall in subsidy on account of diesel, gross underrecoveries were expected to remain high this financial year due to the high underrecoveries on the sales of domestic LPG, which would account for most of the overall pie, ratings agency Icra said in a recent note. “At the current level of Indian basket of crude at $110-111 a barrel and the rupee-dollar exchange rate at 60, LPG retail prices might need a rise (excluding taxes) of Rs 40-45 a cylinder even to keep LPG underrecoveries this year at the level of 2013-14,” said K Ravichandran, Icra’s senior vice-president and co-head (corporate ratings).

In the past two years, prices of subsidised LPG, which accounts for 86 per cent of oil marketing companies’ LPG sales, have been increased by a mere 3.7 per cent, in two tranches. In July 2012, the price was Rs 399 a cylinder, against the current Rs 414.

As of now, oil marketing companies lose Rs 449 on the sale of each subsidised cylinder.

In September 2012, the government had announced a cap of six a year on the number of subsidised LPG cylinders. The cap was revised to nine in January 2013 and to 12 in January this year. “The LPG demand growth is expected to remain high due to the increased cap on subsidised cylinders, which tends to encourage diversion of domestic LPG for auto-LPG, as well as for commercial purposes for which prices are deregulated and are nearly double that of subsidised domestic LPG,” Icra said.

A senior Indian Oil Corporation executive said overall LPG consumption had fallen from nine million tonnes (mt) a year four years ago to six mt last financial year, owing to a shift to piped natural gas. Analysts argue the relaxation in the LPG cap will not lead to the expected decline in consumption. Decisions to relax the cap on the number of subsidised sales and to keep the Direct Benefits Transfer scheme on hold had also contributed to the high subsidy burden on account of domestic LPG, Icra said.