The number crunchers of Finance Minister Nirmala Sitharaman’s Budget team may have to do some jugglery to allocate more funds for domestic LPG (liquefied petroleum gas) and kerosene oil subsidy, if the current volatility in global crude prices continues.
The subsidy — the difference between the selling and the purchase price of domestic LPG and kerosene — is paid by the government to public sector oil marketing companies, for selling the product below market prices to poor households.
Higher crude prices mean that the basic cost price of LPG also goes up. To insulate LPG customers from higher prices, the government has the subsidy mechanism. Currently, consumers of domestic LPG in Delhi pay ₹714 for a 14.2-kg cylinder refill. Pradhan Mantri Ujjwala Yojana (PMUY) and other subsidised customers get ₹178.86 as subsidy.
In 2018, when LPG prices had hit new highs, the subsidy amount touched ₹450 for every 14.2-kg cylinder. Although, the current prices are not expected to rise to those levels, the possibility of the subsidy amount rising above ₹178.86 cannot be ruled out.
The subsidy allocation for LPG in the Budget has zoomed from ₹13,000 crore in 2017-18 to over ₹29,000 crore during the current fiscal. With more emphasis on Ujjwala, the number of subsidised domestic customers is expected to cross 8.03 crore. This along with higher prices will necessitate a higher subsidy allocation in the coming Budget.
The allocation for kerosene subsidy has been stagnant during 2018-19 and 2019-20. Now, even if consumption remains stable but cost prices go up, more money will have to be provided for subsidy.
As on November 1, 2019, there were 27.44 crore LPG customers in the country, out of which nearly 25.82 crore get direct subsidy into their bank accounts, through direct benefit transfer (DBT).
The total consumption of kerosene oil was 34.60 lakh tonnes in 2018-19, while for the first eight months of this fiscal, it was 17.44 lakh tonnes. Most of the kerosene is sold through fair price shops under the public distribution system (PDS) at a subsidised price.
With the escalation of tensions in the Gulf region, crude oil prices have turned volatile. During the first seven trading days of January (2-7), the price of the Indian basket of crude — the rate at which Indian refiners buy crude oil — was between $68.18 and $69.99/barrel.
Though, it is lower than $71/barrel at the beginning of the current fiscal, it is still higher than $59.27/barrel of January 2019. The composition of the Indian crude basket represents the average of Oman and Dubai for sour grades and Brent (Dated) for the sweet grade.
One key issue here is that the rupee has also been depreciating against the US dollar, and this also impacts prices of petroleum products for consumers in India.