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.
