The government could save petroleum under-recoveries to the tune of Rs 9.10 billion in the current financial year if the price of subsidized cooking gas or Liquefied Petroleum Gas (LPG) is raised by Rs 1.95 per cylinder per month till March 2017. The savings would stand at a whopping Rs 20 billion for the next financial year in case the price rise is sustained at the current level of volumes.
The Oil Marketing Companies (OMCs) – Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) – had on Monday raised the price of domestic cooking gas by Rs 1.93 per cylinder. Post the hike, a subsidized LPG cylinder now costs Rs 423.09 in Delhi as against RS 421.16 previously. This was the second straight monthly increase in subsidized LPG prices.
“The OMCs may continue to increase retail prices of subsidised domestic LPG by Rs 2 per cylinder every month, similar to subsidised kerosene retail price hike by Rs 0.25per liter per month. If price hike continues, the move would be an important step in the right direction. Besides, a small quantum of price hike could lighten the burden on the consumers considering the politically sensitive nature of the product,” said K Ravichandran, Senior Vice President at research and ratings agency ICRA.
According to the current under-recovery sharing formula, the centre bears domestic LPG subsidy upto Rs 18 per Kilogram (around Rs 255 per cylinder) under the Direct Benefit Transfer for LPG (DBTL) scheme. For the month of August 2016, the subsidy on domestic LPG stands at Rs 64 per cylinder. This provides comfort to the state-owned oil firms.
“As the domestic LPG under-recoveries of upto Rs 255 per cylinder are to be borne by the centre, the major benefit from fall in Under-Recoveries on domestic LPG would accrue to the government. Also, the benefit of lower under-recoveries would increase with rise in subsidised LPG consumption volumes,” Ravichandran said.
The move to increase price follows various steps taken by the government to reduce subsidy including DBTL, cancellation of fake connections and the GiveItUp campaign. The steps have led to total subsidy savings of Rs 212 billion in the past two financial years according to government estimates.
A gradual increase in subsidised LPG prices would also be positive for OMCs as they gain from marginal savings on interest burden due to lower under-recoveries. Domestic LPG subsidy was earlier expected to reach Rs 255 per cylinder at an Indian Basket crude oil price of $60 per barrel. Beyond that level of crude oil prices, either the consumers or oil companies would have to bear under-recovery on LPG.
According to ICRA, following the total increase of Rs 17.55 per cylinder in subsidised LPG prices, the government may continue to bear threshold LPG subsidy upto crude oil prices of $63-65 per barrel. This would be positive for PSU oil companies over the long term in case crude oil prices increase beyond $65per barrel. Andrew MacDonald Womens JerseyShare This