Budgetary fuel subsidy on LPG likely to go by the end of 2021-22

Next year’s union budget may get itself totally freed of budgetary subsidy on LPG, the culmination of a strategy that had been put in motion for a while now. Since June 2020, the government hasn’t been depositing the subsidy on LPG or cooking gas in the bank accounts of target beneficiaries. Prices of LPG in the country are based on international benchmark prices, which had risen from $359/tonne in October, 2020 to $607/tonne in April, 2021. India imports more than 55% of its LPG requirement. The weightage of LPG in the wholesale price index is 0.64%.

A drop in global crude oil prices since May 2020 gave the government an opportunity to withdraw the LPG subsidy, says Financial Express. The end-consumers did not feel the pinch till November 2020 thanks to muted global LPG prices when even without subsidies domestic LPG cylinders used to cost just around Rs 600, close to the price at which the subsidy had kicked in. As the global prices have since risen, the government did not reinstate the subsidy. The decision to end the subsidy was taken and implemented quietly; there wasn’t any official announcement of the same.

The Centre’s Budget will likely be completely freed from the burden of fuel subsidy in the current fiscal year, marking an end to a sticky and politically sensitive item of revenue expenditure it struggled long to get rid of. One of three major explicit subsidies financed out of the Budget, via oil bonds and by state-owned upstream oil companies, the budgetary fuel subsidy peaked at close to Rs 1 lakh crore in 2012-13.

The process of ending the fuel subsidy began with the decontrol of retail petrol prices by the UPA-II government in June, 2010. The same government had also kick-started the deregulation of diesel prices in January, 2013 via incremental monthly price increases of 50 paise/litre, a process which was completed by the current regime by October, 2014. While the subsidy on kerosene (used for lighting) was negligible since FY15, the only item that continued under the subsidy regime thereafter was cooking gas.

As global rates started rising, the retail price sans subsidy of domestic LPG cylinder crossed the Rs 700-mark in February 2021, and surpassed Rs 800 in May, impelling a large section of low-income users not to refill the cylinders. Of the eight crore beneficiaries under the Pradhan Mantri Ujjwala Yojana (PMUY) scheme, 3.2 crore did not refill their LPG cylinders in the first quarter of FY22. The dip in usage is because the end-price of the standard 14.2-kg cylinder has risen 43.3% since May, 2020. The Centre’s Budget Estimate (BE) for LPG subsidy in FY22 is Rs 14,073 crore; this compares with Rs 36,178 crore spent in FY21.

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