New Delhi: The central government’s call to eliminate subsidy on liquefied petroleum gas (LPG) signals a new era of almost full pass-through of volatile global oil prices to consumers, with little impact on the government balance sheet. 

This is in sharp contrast to the situation a few years ago when oil subsidy blew a hole in government budget, offsetting the revenue earned from the petroleum sector in the form of taxes, royalty, profit share from private oilfield developers and dividend from state-owned companies, impacting the state’s ability to spend on welfare.

In February, the Union budget estimated an oil subsidy of Rs25,000 crore for fiscal year 2018, compared to Rs96,879 crore given as subsidy in fiscal year 2013.

As per the decision oil minister Dharmendra Pradhan communicated to the Lok Sabha on Monday, fuel retailers Indian Oil Corp., Hindustan Petroleum Corp. and Bharat Petroleum Corp. can raise the effective price of subsidized domestic LPG by Rs4 a cylinder from 1 June till the subsidy is eliminated or till March 2018, or till further orders, whichever is earliest.

The subsidy amount on a 14.2 kg cylinder transferred to the bank account of a consumer in Delhi for the month of July was Rs86.54, Pradhan informed the House. 

Once LPG subsidy is eliminated, the only other sensitive petroleum product that will continue to get subsidy will be kerosene, the consumption of which is coming down due to increased number of LPG users and improvement in rural lighting. Two-third of the Rs25,000 crore oil subsidy allocated for the current financial year is meant for LPG and the remaining for kerosene. 

Petrol and diesel, the other two sensitive fuels, are already priced according to their global market prices on a daily basis. 

The prevailing low price of crude oil and petroleum products in world markets has also enabled the government to raise tax revenue from the sector without pinching consumers. The savings in oil subsidy has enabled it to fund schemes such as the Prime Minister’s Ujjwala Yojana, meant to provide LPG connection without upfront charges to 50 million poor households as well as to finance infrastructure projects in the sector. 

The central government is funding about 40% of the Rs12,940 crore cost of laying a 2,500 km gas pipeline extending through Uttar Pradesh, Jharkhand, Bihar, Odisha and West Bengal. For the Ujjwala scheme, it is spending Rs8,000 crore over three years from 2016-17.