Woes of LPG consumers: Result of our belief in free lunch

Unless we stop believing in free lunch and take the unpopular measure of eliminating LPG subsidy, as recommended by several government committees a day will come when LPG supplies will be as uncertain as the power supplies today

To supply domestic LPG (liquefied petroleum gas) as in the past without the newly announced quota of six cylinders the central government would have to allocate directly or indirectly as much as Rs45,000 crore per year to maintain the financial health of the public sector companies. Who have been the major beneficiaries of this government largesse? It is mostly the rich and the middle class. This amount of money can support many urgently needed projects in health, education, water and transportation sectors to benefit the poor. When the choice should be clear, why cannot we accept the new policy, leave alone eliminate LPG subsidy itself? It is because we all seem to believe in the much-discredited free lunch concept.


As the six cylinder quota drama is unravelling with politicians protesting as usual, LPG consumers are not sure when and if they will get their LPG cylinders and at what price. 


Our current demand for LPG is about 15 million tonnes. It is supplied from three sources. About 8 million tonnes are supplied by India’s refineries, which depend for their crude oil supplies on imports to the extent of 80%. They have to pay international prices. About 2 million tonnes are supplied from extracting liquids from natural gas supplies. Since natural gas prices are controlled, the cost of LPG to supply from this source is relatively low. But the remaining 5 million tonnes are imported paying international prices. Thus for 85% of LPG, OMCs (oil marketing companies) have to pay international market prices. If we expect the government to sell LPG at subsidized prices, whom can we depend upon to pay for these imports? Aren’t we fooling ourselves by pretending to believe that we can have free lunch all the time?


At the beginning of November, the cost to import one tonne of LPG from the Persian Gulf was $1,027 (or Rs772 per cylinder). When costs of transportation, bottling, commissions to the dealers and marketing are added, it costs about $1,158 (or Rs912 per cylinder). The current average selling price of LPG for the first six cylinders is $530 per tonne (Rs414 per cylinder). In other words OMCs lose $628 on each tonne of LPG (Rs498 per cylinder). If there are no limits on the purchase of residential LPG, then the oil marketing companies will lose about Rs45,000 crore per year. The government has to compensate OMCs for this loss since it is the government which has forced OMCs to sell LPG below their costs.


If the public sector OMCs are not compensated, they will go bankrupt which will be a big disaster. To keep them in sound financial condition, the government has been subsidizing them in a Taglakhian fashion. It has forced profitable companies like ONGC and Oil India to pay partly for their losses.


In short the “free lunch” to LPG consumers was provided at the cost of public sector oil companies and the tax revenues. However, as LPG subsidy burden was increasing, and fiscal deficit was getting worse, the government decided to impose the six cylinders limit. This has now opened Pandora’s Box with the cure being worse than the disease.


Even before the new policy of six cylinders quota, there were three prices for selling the same commodity—subsidized residential prices, commercial prices and automotive prices. This was a perfect environment for all those involved in the LPG business to mint money by diverting subsidized LPG to those sectors like commercial and automotive sectors where LPG attracted as much as three times the subsidized prices. Research has shown that more than 30% of residential LPG is diverted to generate black money to the extent of 20 to 25 thousands of crores per year.


You may also like to read the Never-ending woes of LPG consumers.


Instead of taking steps to streamline the sale of LPG by reducing the price differential, the government has introduced at least two more prices now—non subsidized domestic prices for those buying more than six cylinders and also non-domestic prices.


Currently LPG prices range from Rs29.2 per kg for residential LPG consumers for the first six cylinders to Rs63.7 per kg for residential consumers beyond six cylinders to Rs81.8 per kg for non-domestic prices to Rs86.3 per kg for commercial to Rs98.1 per kg for the auto sector.


One of the reasons for the LPG quota might have been the embarrassment caused to the government when the media gave wide publicity to the well-known VIPs consuming more than the legally allowed 17 subsidized cylinders per year. The VIP list was headed by the family of industrialist Jindal which consumed 369 cylinders in a year. Some other VIPs whose LPG consumption exceeded the limit of 17 were Kalmadi (63 cylinders), Mayawati (45), A Raja (47), KPS Gill (79), and Jaipal Reddy (26).


On the other hand, according to OMCs, the average consumption of typical family is 7.15 per cylinder per year.  Only about 40% of the families consume less than six cylinders in a year. As a result only 60% of Indian families will be affected by LPG quota. Also among the rural population, less than 9% depend on LPG for cooking, and among the urban it is only about 57% with most of the poor depend on firewood and kerosene according to the Parikh Committee report. Thus the LPG subsidy has indeed been a subsidy to the rich and the middle class for a very long time. It is only in recent years, a small percentage of the poor have been able to get access to LPG.


One strategy that is being discussed by the government to reduce diversion is to sell LPG only at non-subsidized price using the Aadhaar platform and bank cash transfer. This looks fine on paper. However, when many have no UID numbers and may also not have bank accounts, how can this system be implemented?


There is already a race started by different state governments now to gain cheap popularity by declaring to give additional LPG cylinders at subsidized prices. This was actually started by the Congress party president Sonia Gandhi. She asked her chief minsters to give two additional cylinders. How this will be administered is still not known. This LPG subsidy race may become like a populist measure of giving free power to win elections. It is such a policy which has resulted in power companies going insolvent. More than likely the profitability of OMCs will also be affected in the future even though their shares are traded on the stock markets.


Unless we stop believing in free lunch and take the unpopular measure of eliminating LPG subsidy as recommended by several government committees, a day will come when LPG supplies will be as uncertain as the power supplies today.


Also read: How to use your subsidized LPG cylinders wisely?



Anil Agashe

5 years ago

Well written bringing out all facts of the matter. this is what has to be told to people.

Rajan Manchanda

5 years ago

It cost's OMC's Rs.912 per cylinder.Subsidy can definitely be abolished.According to THE PLANNING COMMISSION a income of Rs.32 per day suffices to survive.
Rs 32 X 30 days generates Rs.960 per month.Even if a person uses one cylinder per month he is still left with Rs.48 per month.He can always live on GAS !

We all forget,how difficult life is for the common man.

Vaidya Dattatraya Vasudeo

5 years ago

It means if you are citizen rich enough and better placed to use LPG, Government will give you a gift of subsidy of 6 cylinders. And if you are poor, you do not get that. If at all, Government wants to continue the subsidy, it should be given to an individual as a unit and not by family as a unit. A rich person having residential premised in number of states gets more benefit, without ever getting detected. It should be given to every individual, even if he is using wood, kerosene or newspapers. With the present policy,it is advisable to get registered for the cylinders, whether you need it or not. Those who can not afford to do that either, there will be agencies who will help them do it and get the subsidy credited to their account rgularly. This will be done, of course, for a fee. Alternatively just get registered, borrow some money for buying a cylinder and sell it for cash immediately. Indian are very innovative, particularly when it is a matter of getting undue advantage. Government will not mind turning a nelson's eye to these activities, for a price. Bhrashtachar Zindabad.

SEBI slaps Rs6.75 lakh fine on Concurrent India, its two promoters

SEBI has imposed a penalty of Rs50,000 on Concurrent (India) Infrastructure Ltd, (now known as Shriniwas Power & Infrastructure Ltd) and Rs3 lakh on K Nirupama and Rs3.25 lakh on K Nirmala, both promoters of the company

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) has slapped a total fine of Rs6.75 lakh on erstwhile Concurrent (India) Infrastructure Ltd (CIIL) and its two promoters for allegedly not complying with the disclosure norms related to the company's shareholding details, reports PTI.
In three separate orders dated 30th November, SEBI has imposed a penalty of Rs50,000 on Concurrent (India) Infrastructure Ltd, (now known as Shriniwas Power & Infrastructure Ltd) and Rs3 lakh on K Nirupama and Rs3.25 lakh on K Nirmala, both promoters of the company.
"impose a penalty of Rs50,000 on the noticee, Concurrent (India) Infrastructure Ltd, (now known as Shriniwas Power & Infrastructure Ltd...impose a penalty of Rs3 lakh on the noticee, K Nirupama... impose a penalty of Rs3.25 lakh on the noticee, K Nirmala...," the regulator said in three separate orders.
The regulator said the company filed incorrect and misleading information with the BSE related to the shareholding of two promoters -- K Nirmala and K Nirupama for quarter ended March 2011.
It was alleged that the two promoters had pledged certain shares of CIIL and their respective shareholding had undergone changes consequent upon the invocation of the pledge.
SEBI said it was revealed that the two entities had not not made necessary disclosures regarding the creation of pledge and invocation/ revocation of pledge of shares within seven working days as per SEBI's regulations.
Regarding the shareholding of the Nirmala, SEBI said out of 7.36 lakh CIIL shares pledged by the entity, two lakh CIIL shares were invoked on 4 February 2011.
Upon invocation, SEBI said Nirmala's stake declined to 26.35 lakh shares or 6.15%. However, the shareholding pattern showed that Nirmala held 28.35 lakh scrips or 6.58% holding in the company.
Similarly, in case of Nirupama, a total of 17 lakh CIIL shares were invoked on 17 March 2011 and 18 March 2011, subsequent to which her holding fell to 12.43 lakh shares or 2.98%.
However, the shareholding pattern for the quarter ending March 2011 had disclosed 17 lakh shares to be encumbered and her shareholding to be 29.43 lakh shares or 6.84% stake which is incorrect.
"The shareholding pattern indicates a higher shareholding of the said promoter entities (K Nirmala and K Nirupama) than the actual holding which was incorrect and therefore misleading to the general investors," SEBI said.


Government to finalise Rs15,000 crore fund infusion in PSBs this week

Top three banks which require capital are Indian Overseas Bank, Central Bank of India and the Bank of Maharashtra

New Delhi: The Union government said it will decide about Rs15,000 crore capital infusion in the public sector banks (PSBs) to shore up their capital base this week, reports PTI.


"This week there will be some announcement about the allocation (to various banks)," Department of Financial Services Secretary DK Mittal said.


"Allocation of the funding will be decided and rest I think the process still has to go through," he said.


Asked if the capital infusion would be done through rights issue, he said it has to be first approved by respective boards and then the Finance Ministry will take a view on that.


"If there is rights issue, there is scope for anybody to go in...LIC is not a short-term investor," he said to a query if LIC will be asked to subscribe to the rights issue.


"May be LIC will also make money by selling some of the equities when they come to the market," he added.


He said the government has made budget provision of Rs15,000 crore for recapitalisation of banks in the current fiscal.


The top three banks which require capital are Indian Overseas Bank, Central Bank of India and the Bank of Maharashtra. State Bank of India would also need capital, he said.


All but one Dena Bank have tier I capital of above 8% well above Basel norms.


Asked about holding company structure, Mittal said the Reserve Bank of India has given its feedback and the Finance Ministry is analysing it.


"RBI has broadly agreed on this... However, there is a need to look at regulatory platform because it would be such a large conglomerate (holding company) and how to be regulated.


What kind of capital adequacy it should have," he said.


"Broadly, they (RBI) said we support this view...the government is yet to take a view on (holding company structure for the public sector banks)," he said.


The 2012-13 Union Budget had proposed setting up of a financial holding company that would help raise resources to meet capital needs of state-owned banks. .


On the cash subsidy transfer scheme roll out from 1st January, Mittal said banking system is fully ready for the roll out across the identified districts.


"Banking system is fully geared up to meet this challenge. We have been working on this the last 10 months and I think banking system has done a great job, including private sector banks also, and we are fully ready," he said.


Meanwhile, Central Registry of Securitisation Asset Reconstruction & Security Interest of India (CERSAI) and Credit Information Bureau (India) Ltd (CIBIL) have signed an agreement to share information.


"This partnership between the two institutions has been conceived with a view to bringing synergy of information and operations by the lending institutions," he said.


This collaborative venture will bring considerable value to the industry and enhance their confidence in lending, he said.


The scope and coverage of the central registry will be further expanded to include a host of other activities and information that relate to the financial sector, he added.


As many as 296 banks, housing finance companies and financial institutions have so far registered themselves with CERSAI and are filing the details of the mortgages taken by them by deposit of title deeds. It has now a data base of more than 75 lakh records of equitable mortgages.


Banks can, before accepting any title deed for mortgage, make a search in the CERSAI record to ensure that there is no existing mortgage or loan against the property, and thus avoid any potential fraud or multiple financing.



nagesh kini

5 years ago

When the PSBs are doing well on the stock exchanges as the result of investor confidence, I feel it will better to open the new issue to small and/or domestic institutional share holders to the exclusion of FIIs, this will enable local infusion instead of the Government increasing its equity which it should decrease any way. It can divest some of it through this route too.

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