Quick Take | Betting on the government’s scheme to provide free cooking gas

Europe, Spain, View Of Lorry Carrying LPG Gas Cylinders Driving On Highway

Ujjwala Yojana, the government scheme of providing free cooking gas (LPG), has now been extended to all poor households. The scheme, originally targeted at rural women members of BPL (below poverty line) households, was later expanded to include all SC/ST households and forest dwellers. This latest move will increase penetration of LPG.

The benefits of using clean fuel are obvious. The question is: what is the cost attached? The central government is bearing the cost of the security fee for the cylinder and fitting charges by providing a subsidy of Rs 1,600 to state-owned fuel retailers. Apart from installation, the government also subsidizes the consumption of 12 LPG cylinders per household per year.

However, the government generally shies away from increasing the price of LPG in line with international prices and ends up absorbing the increased subsidy. Needless to add, it also frequently delays its payments to public sector refiners, affecting their working capital.

To top it all, India does not have enough LPG production capacity and ends up importing a substantial quantity. Consumption of LPG has increased from 7 million tonnes in 2000-01 to 21.5 million tonnes in FY17, while imports have increased from 0.85 million tonnes to 11 million tonnes. This gap is expected to widen as refiners are setting up new capacities at a slower rate than the consumption of LPG.

How could investors benefit from the government’s largesse? They could play on the LPG consumption story by betting on the importers, cylinder manufacturers and companies providing LPG import facilities.