New Delhi: The National Democratic Alliance (NDA) government has shelved its plan to phase out subsidy on cooking gas as a sustained rise in fuel prices in global markets has made the scheme politically unwise as well as unworkable.

Subsidy on LPG, extracted from natural gas, has risen sharply in recent months to Rs251 a cylinder effective from 1 December, up from Rs41 last September.

The idea of cutting subsidy by Rs4 a month from June 2017 was to phase it out completely by 2018.

An official privy to the development said on condition of anonymity that this monthly cut in subsidy has now been kept in abeyance.

“However, retail LPG price will continue to fluctuate depending on global price of the fuel and tax rate changes if any," said the official. The official explained that given the high level of subsidy prevailing now it has become almost impossible to phase it out any time soon.

Rising subsidy burden could reverse the gains the central government made in recent months on indirect tax buoyancy by way of raising taxes while prices remained subdued. As a large importer of crude oil, high prices can also worsen its trade deficit. State governments, which levy taxes on fuel on an ad valorem basis, may make revenue gains in the short term but may come under political pressure to cut tax rates.

The government is on a drive to boost LPG use, including by giving poor households access to the clean fuel without upfront costs under the Ujjwala scheme. Over 32 million connections have been given under this scheme. Withdrawing subsidy completely will also affect the capability of the poor households to seek refills, something which could undermine the objective of encouraging LPG use. LPG is now sold at market prices and the subsidy is transferred to the beneficiary’s bank account.

Brent crude, which is used to price international oils, was trading at $66.50 per barrel in London on Thursday. That is a two-and-a-half-year high for the commodity. Retail price of diesel on Thursday went up to Rs59.47a litre, a record high based on official data available from the year 2002 with the state-owned Indian Oil Corp. Petrol price too inched up to Rs69.81 a litre on Thursday.

Price of both the auto fuels are market linked.

Higher diesel price will impact freight cost and will add to inflationary pressure, while costlier petrol will reduce the discretionary spending of two-wheeler owners, who account for two-thirds of petrol consumption, explained K. Ravichandran, senior vice-president of Icra Ltd. An increase in jet fuel price can impact the cash flow of airlines and costlier petroleum derivatives can adversely impact certain industries that use them as feedstock, he added.

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