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?