Nilanjan
On August 29, 2023, the Union Cabinet announced a major decision to reduce the price of liquefied petroleum gas (LPG) cylinders by Rs 200 for all consumers in the country. The move was hailed as a “Raksha Bandhan gift” by the government, as it came on the eve of the festival that celebrates the bond between brothers and sisters. The price cut was also seen as a relief for the common people who have been facing high inflation and rising fuel costs.
However, the price cut is not uniform for all consumers, as it depends on whether they are beneficiaries of the Pradhan Mantri Ujjwala Yojana (PMUY) or not. The PMUY is a flagship scheme of the Modi government that aims to provide free LPG connections to poor women who use traditional fuels such as wood, coal, and dung for cooking. The scheme was launched in 2016 and has so far covered over 9.6 crore households.
We will explain what the LPG price cut means for different consumers and how it will affect the oil marketing companies (OMCs) that sell LPG in India.
LPG Price Cut: Who Gets What?
The LPG price cut announced by the government is Rs 400 per 14 kg cylinder for PMUY beneficiaries and Rs 200 per cylinder for non-PMUY consumers. This means that PMUY beneficiaries will get a total subsidy of Rs 400 per cylinder, which includes Rs 200 as existing subsidy and Rs 200 as an additional subsidy. Non-PMUY consumers will get only Rs 200 as a price reduction and no subsidy.
The government has also decided to provide 75 lakh new LPG connections free of cost to clear the pending applications under PMUY. This will take the total number of PMUY beneficiaries to 10.35 crore.
The new prices will be effective from August 30, 2023. According to the latest data from the Ministry of Petroleum and Natural Gas, the price of a 14 kg domestic LPG cylinder in Delhi was Rs 1,103 as of August 1, 2023. After the price cut, it will be Rs 903 for non-PMUY consumers and Rs 703 for PMUY beneficiaries.
The prices of LPG cylinders vary across different states and cities depending on local taxes and transportation costs. The last revision in LPG prices was done on March 1, 2023, when they were increased by Rs 50 per cylinder.
LPG Price Cut: Why Now?
The government’s decision to reduce LPG prices comes at a time when India is facing high inflation and rising fuel costs. According to the latest data from the Ministry of Statistics and Programme Implementation, India’s retail inflation rose to a 15-month high of 7.44 percent in July 2023, mainly driven by food and fuel prices. The inflation rate breached the Reserve Bank of India’s (RBI) upper tolerance limit of 6 percent for the second consecutive month.
The high inflation has eroded the purchasing power of consumers and affected their household budgets. The rising fuel costs have also increased the transportation costs of essential goods and services, adding to the inflationary pressure.
The government’s decision to reduce LPG prices is seen as an attempt to ease the burden on consumers and boost their confidence. It is also seen as a political move ahead of the upcoming assembly elections in four states – Uttar Pradesh, Punjab, Uttarakhand, and Goa – and the Lok Sabha elections in 2024. The government wants to showcase its pro-poor and pro-women credentials by providing relief to millions of LPG users, especially those who are covered under PMUY.
LPG Price Cut: How Will It Affect OMCs?
The LPG price cut announced by the government will not affect the profitability of OMCs, according to sources quoted by CNBC-Awaaz[^3^][3]. The sources said that OMCs have enough headroom to absorb the price cut without any compensation from the government.
OMCs are state-owned companies that sell LPG in India. They include Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL). OMCs procure LPG from domestic sources or import it from international markets. They sell it at market-determined prices to non-subsidized consumers and at subsidized prices to PMUY beneficiaries.
The subsidy on LPG cylinders is borne by the government through its budgetary allocation. The subsidy amount is transferred directly to the bank accounts of PMUY beneficiaries under the direct benefit transfer (DBT) scheme. OMCs do not incur any loss on selling LPG cylinders at subsidized prices.
The price of LPG cylinders is determined by OMCs based on a formula that takes into account the international price of LPG, the exchange rate of the rupee against the US dollar, and the local taxes and transportation costs. OMCs revise the price of LPG cylinders every month based on this formula.
According to the sources, OMCs have enough headroom to absorb the price cut because the international price of LPG has fallen in recent months. The sources said that the cost of a 14 kg LPG cylinder for OMCs is around Rs 700, which gives them a margin of around Rs 200 per cylinder. Therefore, OMCs can reduce the price of LPG cylinders by Rs 200 without any compensation from the government.
The sources also said that the government will review the situation after a few months and decide whether to continue with the price cut or not. The decision will depend on the consumption trends and the international price of LPG.
Conclusion
The government’s decision to reduce LPG prices by Rs 200 per cylinder is a welcome relief for consumers who have been facing high inflation and rising fuel costs. The decision will benefit both PMUY and non-PMUY consumers, but more so for PMUY beneficiaries who will get a total subsidy of Rs 400 per cylinder. The decision will also help the government to showcase its pro-poor and pro-women policies ahead of the upcoming elections.
However, the decision will not affect OMCs, who will not get any compensation from the government for the price cut. OMCs have enough headroom to absorb the price cut without any loss, as the international price of LPG has fallen in recent months. The government will review the situation after a few months and decide whether to continue with the price cut or not.
