LPG cylinder prices increased. (file photo)
Despite a Rs 29 per cylinder increase in domestic LPG prices, the price of cooking gas in Indian households remains the lowest in the world, the government said on Sunday. This increase has been made after a huge jump in international LPG prices due to blockages in West Asia. In Delhi, the price of 14.2 kg domestic LPG cylinder has been increased from Rs 913 to Rs 942.
At the same time, beneficiaries of Pradhan Mantri Ujjwala Yojana (PMUY) will have to effectively pay Rs 642 per cylinder after getting a subsidy of Rs 300 per refill on the first four refills every year (9 refills were announced last year). This increase comes after an increase of Rs 60 per cylinder on March 7, taking the total increase to Rs 89 on a 14.2 kg cylinder. It is estimated that before this latest change, government oil marketing companies were incurring a loss of approximately Rs 703 on every LPG cylinder sold.
LPG cheaper in India than neighboring countries
The government said in a statement that after the war in West Asia started in late February, there was a surge in international prices, due to which the cost of supply of domestic LPG cylinder has increased to more than Rs 1,600. India’s LPG import cost is linked to the Saudi Contract Price (CP), which is the global benchmark for this fuel. According to the statement, this benchmark has increased by about 46 percent since February, as supplies from the Gulf region were reduced due to blockages related to the Strait of Hormuz. The government said that despite the increase, domestic LPG prices remain low compared to neighboring countries like Pakistan, Nepal, Bangladesh and Sri Lanka and much lower than the prices of developed economies like the US, Australia and Canada.
There is no shortage of petroleum products
The government also said that India was among the few countries that were successful in maintaining uninterrupted energy shipments through the Strait of Hormuz during the crisis, resulting in no shortage of LPG or other petroleum products in the country. To ensure availability, domestic LPG production was increased and supply was diversified through alternative sourcing arrangements, it said. According to the statement, the total under-recovery (difference between cost and selling price) on domestic LPG sales increased to about Rs 60,000 crore by the end of the last financial year, compared to Rs 41,338 crore a year ago. The Union Cabinet has approved compensation of Rs 30,000 crore to government oil marketing companies to compensate for these losses to some extent.
LPG cylinder of PMUY beneficiary
The government said the recent changes strike a balance between protecting households from fluctuations in global energy prices while also ensuring consistent availability of cooking fuel across the country. The statement said that the prices of petroleum products in India are linked to the respective prices in the international market. However, the government continues to control the effective price consumers receive for domestic LPG. Any family can buy any number of cylinders as per their need for Rs 942.
The PMUY beneficiary will also get a Direct Benefit Transfer (DBT) of Rs 300 per cylinder on the first four refills every year – which is typically equivalent to the average annual consumption of a Ujjwala family i.e. about four refills a year – and so they effectively pay Rs 642 for those refills; This assistance remains the same. Even non-PMUY households will pay around Rs 700 less than the market-linked price of the cylinder.
Government and company bear this burden
Retail prices vary slightly from location to location due to distribution costs. It was said that the family does not have to bear the burden of several hundred rupees per cylinder, which is being borne by the government. During huge increases in international costs, that burden was handled at the upstream level rather than being passed on to the consumer. Whereas the price of commercial cylinders used in hotels and businesses keeps changing automatically every month.
Its price is directly linked to the international benchmark, which is not the case with domestic cooking cylinders. The government said India used to import 60 per cent of its LPG requirements, and the landed cost of that import is determined based on the Saudi contract price (CP), which Saudi Aramco decides at the beginning of every month. This is an external price over which the Indian consumer has no control.
Prices increased in the international market
The benchmark rose sharply due to the disruption in West Asia. Considering the 50:50 mix of propane-butane for LPG used in India, the Saudi CP (contract price) for LPG in February before the disruption was around $543 per tonne. Following the closure of the Strait of Hormuz in late February, the April contract price – the first price set after the blockage reduced exports from the Middle East Gulf – rose to $775 per tonne (propane was $750 and butane $800), and has since risen to $790 per tonne in June. The statement said that in this way, the benchmark price of blended LPG has increased by about 46 percent compared to the February level before the crisis.
Commercial LPG price increased
According to the government’s statement, its effect is completely visible in market-priced commercial cylinders. After the price hike five times during the West Asia crisis, a 19 kg cylinder used in hotels and restaurants sells for Rs 3,113.50 (about Rs 164 per kg) in Delhi. In contrast, for domestic use, the price after the price revision is around Rs 66 per kg. The tax rate on commercial gas is higher and the margin is also higher, hence its price is higher than the cost based price of gas for domestic use. Still, the import-linked cost of a domestic cylinder remains more than Rs 1,600.
Increase in domestic production
The government said that despite the blockage in the Strait of Hormuz, it continued the supply of LPG and other petroleum products without any interruption. This is an important shipping route through which 54 percent of India’s LPG is imported. Domestic LPG production was increased by more than 60 per cent — from about 32,000 tonnes per day to about 52,000 tonnes — new suppliers like the US, Canada and Algeria were added for imports, and uninterrupted flow of LPG cargo to Indian ports was ensured, thereby avoiding shortages in the domestic market.
To conserve supply, customers were encouraged to switch to piped natural gas (PNG), where available. Also, OTP-based delivery verification was used extensively to prevent subsidized LPG cylinders from being diverted for commercial use. The government said that these measures helped in maintaining domestic supplies even at a time of geopolitical tensions and supply-chain disruptions.
How much under recovery was there?
The statement said that under-recovery (the difference between cost and selling price) is different from subsidy. The difference between the international cost and the regulated retail price – an estimated amount of Rs 60,000 crore on domestic LPG in the last full year, from Rs 41,338 crore the year before – is borne by public sector marketing companies and the exchequer. For this, the Union Cabinet has approved a compensation of Rs 30,000 crore. Additionally, Ujjwala customers get an additional Rs 300 per cylinder directly into their bank account, and this benefit reaches over 10.58 crore connections.
