Rising LPG PricesApprox Read Time: 4 minutes
- LPG prices, which are revised on a monthly basis, recently saw a price hike which has been the sharpest since January 2014.
- The rate for unsubsidized, 14.2 kg cylinders has risen by a steep ₹144.50 in Delhi, Mumbai, Kolkata and Chennai, at ₹858.50.
LPG price determination in India:
- Domestic prices of liquefied petroleum gas (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 — such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions and the Goods and Services Tax — are added.
- The government then resets the LPG price every month, which is influenced by international prices and how the rupee has behaved against the dollar in the immediately preceding weeks.
Impact of the price hike:
- The price increase will affect retail consumers who have given up the subsidy, while for those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy. Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy.
- At a time when consumer demand, in general, for goods and services in the country has gone down, more cash in the hands of the retail consumer may have helped to boost demand. But instead the LPG price has been hiked.
- However, the current price rise will take 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 consumer price index inflation has seen a rise over the past few months and had accelerated to 7.59% in January.
- The January inflation metric was the highest since May 2014, when the figure was at 8.33%. The current LPG price rise could also push up headline inflation even further.
Impact on subsidy:
- Prior to the latest round of the price increase, the government had raised LPG cylinder prices by ₹62, starting from August 2019.
- This, along with the increase of ₹82 that had taken place over five years to mid-2019, indicates an inclination towards increasingly lesser subsidy. In the latest round, though, the Centre has sought to absorb much of the increase for those availing subsidy.
- It looks like the most recent increase has been beyond its control and it is hence raising the subsidy levels to protect consumers, given that the economy is suffering from lack of consumer spending.
- With the current price rise, the subsidy offered in Delhi, for example would go up from ₹153.86 to ₹291.48. Likewise, for Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.
- For most of December, the Brent crude price had been on an uptrend and had peaked at $68.91 in early January, but with the coronavirus disease in the news, fears of a global slowdown have pushed oil prices down through January.
- With international crude prices on the downtrend, it is likely that the LPG prices too would come down, if the rupee-dollar exchange rate does not fluctuate significantly.