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Explained | Why LPG prices are rising

Mar 03, 2021 / 11:41 AM IST

The government has blamed the rise in international rates for the spike in prices of LPG in India. The surge could push it to resume paying the subsidy on cooking gas, which was stopped after global prices fell when the pandemic began to take hold.

Cooking gas prices in Delhi zoomed from Rs 581.5 a cylinder in May 2020 to Rs 819 as of March 1, 2021

Adding to the woes of consumers, the price of liquefied petroleum gas (LPG) for domestic consumption has increased by 41 per cent or Rs 237.5 per cylinder in the last ten months.

Cooking gas prices in Delhi zoomed from Rs 581.5 a cylinder in May 2020 to Rs 819 as of March 1, 2021. In 2021 alone, prices were hiked by Rs 125 per cylinder with three consecutive hikes in February, going against the conventional practice of having only one hike in a month.

India has a total of around 28.8 crore LPG consumers, of which 13.5 crore are served by Indian Oil Corporation, 7.4 crore by Bharat Petroleum Corporation and 7.9 crore by Hindustan Petroleum Corporation. There has been a 95 per cent increase in India’s LPG consumption from 14.8 crore in 2014-15. The country’s LPG penetration is almost 99 per cent now, mainly owing to the Pradhan Mantri Ujjwala Yojana (PMUY).

It is this spike in the number of users that makes the rise in prices a cause for concern as more than 8 crore people below the poverty line are consumers under the Ujjwala scheme. Moreover, the government did away with the direct benefit transfer on LPG (DBTL) subsidy from May 2020.

How prices are determined in India

The price of LPG is decided based on an import parity price (IPP) formula, which is based on international product prices. Saudi Aramco’s contract prices are considered a benchmark for this calculation. The IPP formula includes Saudi Aramco’s LPG prices, free-on-board price, ocean freight charges, customs duties and port dues.

Local freight charges, bottling charges, marketing costs, margins for OMCs, dealer commissions and Goods and Services Tax are also factored in before determining the final LPG retail price in India. In addition, currency fluctuations also affect prices.

It is because of this weightage of international prices that the government points to the rise in global prices as the major reason for the spike in Indian rates.

Why LPG prices are increasing

The Indian Basket Crude oil price increased from an average of $20.20 a barrel in May 2020 to $64.54 a barrel on March 2, 2021. Brent crude prices increased to $63.77 a barrel at one point on March 2 as compared to a historic low of $19 a barrel in April 2020.

India’s LPG mix has a 60 per cent share of butane and 40 per cent share of propane. Hence, the prices of these two are considered vital. In March, Saudi Aramco set its term contract price at $625 per metric tonne, up by $20 per mt from February. Similarly, butane prices also increased by $10 to $595 per mt in March. This is a 171 per cent increase in propane and a 148 per cent increase in butane prices since May 2020, when the propane price was at $230 per mt and butane at $240 per mt.

On the other hand, the exchange rate on March 2 was Rs 73.29 per dollar as compared to the average rate of Rs 76.23 per dollar in May.

How the price rise will affect the government

The government had eliminated the subsidy on LPG when international prices dipped owing to the COVID-19 pandemic. In Delhi and several other States, the government stopped paying a subsidy under the DBTL scheme from May. The current increase in prices means that the government will have to bring back the subsidy on cooking gas.

In the Budget last month, Finance Minister Nirmala Sitharaman had provided Rs 12,480 crore as LPG subsidy for 2021-22, as compared to Rs 25,520 crore in 2020-21 and Rs 35,605 crore in 2019-20. This indicates that the government is likely to bring back the subsidy mechanism soon.

Shine Jacob
first published: Mar 3, 2021 11:40 am
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