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The finance ministry has slashed the allocation for petroleum subsidy by two thirds to 12,995 crore for FY22 despite increasing the number of Ujjwala beneficiaries by 10 million, hoping that gradual price increases for subsidized cooking gas cylinders will reduce the subsidy burden on the government.

“This is part of the long-term clean-up in subsidies. We have been gradually increasing the prices of kerosene and cooking gas. This will continue next fiscal. Every year, we are releasing a lot of arrears also; so, arrears are going down. So, the amount of petroleum subsidy to be released next year is low. It is the effect of cumulative improvement," a finance ministry official said on condition of anonymity.

Petroleum prices have been on the rise with increase in international crude oil price, the finance ministry official said. However, cooking gas prices are not correlated with crude prices and are still moderate, he said.

“Last year, there was a significant moderation in the price of cooking gas, which reduced the subsidy. Next year also, we don’t expect cooking gas prices to go up the way petrol prices have gone up. It is a completely different market. The elasticity in prices is less as the transportability is less. It is not as volatile as the crude price," he said.

Fuel retailers revise prices of LPG cylinders, which is primarily dependent on the international benchmark rate of LPG and the exchange rate of the US dollar and the rupee.

A query sent to the spokesperson of the petroleum ministry remained unanswered till the time of going to press.

Decontrol of petrol and diesel prices since 1 January 2015 reduced the fiscal burden on the government with petroleum-related subsidies now restricted to kerosene and LPG. The government has implemented direct benefit transfer (DBT) for LPG, while kerosene allocation to states for distribution through the public distribution system has been rationalized from 2016-17 and steps have been taken to enhance DBT coverage for kerosene.

“In view of these measures, the petroleum subsidy as a percentage of net revenue receipts has declined from 9.1% in 2011-12 to 1.6% in 2018-19 and from 0.8% to 0.1% of gross domestic product during the period. Kerosene subsidy has declined steeply from 28,215 crore in 2011-12 to 3,659 crore in 2020-21 (budget estimate). This has arguably been one of the most far-reaching expenditure reforms in the last five years," the 15th Finance Commission (FFC) said in its report.

The FY21 Economic Survey also said the decline in global petroleum prices acted as an important fiscal shock absorber during FY21, as it led to a decline in petroleum subsidies and a rise in revenue collection from excise duties because of increased excise duty levies on petroleum products.

The FFC in its report said the Ujjwala scheme may increase the subsidy burden on LPG in the future unless the subsidy regime is rationalized to eliminate non-poor beneficiaries or there is a cap on the number of subsidized cylinders. The Ujjwala programme, launched on 1 May 2016, aims to safeguard the health of women and children and lays the basis for a fundamental material transformation at the bottom of the pyramid by covering 715 districts. The scheme provides financial support of 1,600 for each LPG connection to the eligible BPL households.

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