LPG prices seen sharp rise

Economy

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 


LPG prices seen sharp rise

Context

LPG prices which are revised on a monthly basis rose sharply in February, highest since Jan 2014.The rate for unsubsidised 14.2 kg cylinders rose by ₹144.50 -₹149 in metro cities

Comparison of Price rise

• Prior to this round, the government had raised LPG cylinder prices by ₹62, starting from August 2019 – Indicating less penchant for subsidy rationalisation
• However, the price had increased by only ₹82 over five years to mid-2019 – indicating retail price has been highly subsidised given the populist sentiment attached to it.

Who will the price rise affect?

• The price increase will affect retail consumers who have given up the subsidy.
• For those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy. For Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.
• Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy.

Implications for the broader economy

• At a time when consumer demand, in general, for goods and services in the country has slumped, more cash in the hands of the retail consumer may have helped spur demand

• Price rise of LPG sucks away even more disposable income from those consumers who pay market rates for LPG.

• As a result, household budgets are bound to go up, especially for those not availing the subsidy. 

• The increase in LPG price could spur inflation even further. The January inflation metric was the highest since May 2014, when the figure was at 8.33%.

What influences LPG prices in India?

• Domestic prices of LPG are based on a formula — the import parity price (IPP), which is based on international LPG prices.
• Saudi Aramco’s LPG price acts as the benchmark for the IPP and includes the free-on-board price, ocean freight, customs duties, port dues and the like.
• This dollar-denominated figure is converted into rupees before local costs are added –bottling, marketing, margins for companies and tax
• This helps the government arrive at the retail selling price for LPG

The government resets the LPG price every month depending on international prices and the rupee-dollar exchange rate in the preceding weeks.

Reason for recent steep hike in LPG Prices

• Crude Oil prices tend to affect Saudi Armaco’s Propane price
• Owing to rise in crude oil prices in December and early January, Saudi Aramco had raised its propane prices to $565 per metric tonne in January ($440 a metric tonne in December)
• This increase in propane prices led to increase in LPG price hike in February
• However, the exchange rate been within the range of ₹71-₹72 to the dollar

What is the future outlook?

• The coronavirus (COVID-19) disease outbreak and fears of a global slowdown have pushed oil prices down through January, save for a few spikes.
• With international crude prices on the downtrend, it is plausible the LPG prices too would see a slump. 
• Aramco has lowered its propane price for February to $505 per metric tonne. 
• Assuming not much changes on exchange rate front, a softening of LPG prices in the domestic context may be expected.

Did You Know?

• LPG  – a mix of propane and butane -is an energy-rich fuel source with a higher calorific value per unit than other commonly used fuels, including coal, natural gas, diesel, petrol. 
• The carbon footprint of LPG is 20% lower than that of fuel oil and 50% lower than coal.
• LPG is non-toxic and has no impact on soil, water and underground aquifers
• It is used in transportation, in commercial business, industry, farming, domestic heating and cooking

Connecting the dots!

• PAHAL Scheme – direct cash transfer of subsidy for Liquefied Petroleum Gas (LPG) used in household cooking.
• Give it Up Campaign of LPG