Home / Politics / Policy /  Cap on LPG cylinders may lead to diversion

New Delhi: The Congress-led United Progressive Alliance government’s decision to limit the supply of subsidized cooking gas will lead to dual pricing, and could increase the diversion of domestic gas cylinders for commercial use and contribute to the black market economy.

The government on Thursday announced its decision to limit the number of subsidized cooking gas cylinders to households to six a year.

The government is already grappling with the issue of domestic gas cylinders being diverted for commercial use. The per kg price of domestic gas is lower than that used for commercial purposes and the difference encourages the diversion of cylinders for the home to users such as hotels, restaurants and the auto sector.

“The LPG (liquefied petroleum gas) cylinder cap is a welcome step to ensure targeting subsidy. One of the undesired outcomes, though, is feared to be that domestic consumers who run short of allocation or are unable to obtain connections would resort to the grey market, which thus far was suspected to be (the) domain of unintended commercial consumers," said Deepak Mahurkar, director (oil and gas industry practice) at PricewaterhouseCoopers.

There are 140 million LPG connections in the country, of which 99.57% are for domestic use, comprising 14.2kg LPG cylinders, according to official data. There are a total of 9,422 LPG distributors in the country and the LPG customer population covers around 56% of the country’s total.

“If one doesn’t divert domestic gas cylinders (for commercial use), the dealers will do that for you," said Sebastian Morris, professor at the Indian Institute of Management, Ahmedabad. “There is already a lot of diversion towards automobile and industrial use, which will go on. The focus will be now on reactivating and registering false accounts, and the dealers will use this route."

Morris is also the co-author of a research paper—Efficient Subsidisation of LPG: A Study of Possible Options in India Today.

The government’s move also sets the stage for a roll-out of cash transfers as outlined in the Union budget for 2012-13, followed by restriction of the cash subsidy to targeted customers. This mechanism was recommended by a task force headed by Nandan Nilekani, chairman of the Unique Identification Authority of India.

To implement direct cash transfers, however, the government will have to summon the political will to push through a radical makeover of the subsidy regime at a time when it is under attack over irregularities in coal block allocations.

“Everyone will have to pay a market price for all domestic cooking gas. This market price today is around 775 per cylinder. Whoever then is eligible for subsidy will get a direct transfer of cash in the bank account. We are working on it," said a petroleum ministry official requesting anonymity.

“The restriction in number of subsidized cylinders will only marginally impact the middle class as about 45% of the customers (mostly in lower and middle class) consume less than six cylinders per annum," rating firm Icra Ltd said in a report. The decision on capping cylinders was taken by a cabinet committee on political affairs headed by Prime Minister Manmohan Singh. The panel also agreed to an increase of 5 a litre in the price of diesel (the actual price including taxes varies across cities).

As a result, Indian Railways expects its diesel bill to rise by around 600 crore for the remaining part of this fiscal year. The railways, which consumed around 2.5 billion litres of diesel in 2011-12 for running its 4,450 diesel locomotives, spends around 10,500 crore every year on the fuel.

The railways buys diesel from government-owned oil marketing companies (OMCs) Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd. The railways is granted a subsidy of 30 paise on every litre of diesel by these OMCs currently.

India subsidizes most fuels and its annual bill for this was expected to be 1.87 trillion this year. The government expects that to come down by around 15,000 crore on account of the increase in diesel prices and drop by an additional 5,300 crore on account of the limit on LPG cylinders.

India’s oil import bill rose from 4.09 trillion in 2009-10 to 7.26 trillion in 2011-12.

State-owned OMCs are compensated by the government for selling diesel, kerosene and cooking gas at fixed prices that are significantly lower than the cost of production. The losses of these companies continue to rise because they can’t sell petrol at market rates despite the government’s claim that they are free to fix prices.

Together, these companies lost 47,000 crore in the first quarter of this fiscal year from selling diesel, kerosene and domestic LPG cylinders below cost to keep inflationary pressures under check. The under-recovery for 2012-13 is expected to be around 1.67 trillion.

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