DH Deciphers: LPG gas cylinder price blast rips through middle-class budget

What has the Union Government announced?

The Union government has announced an increase in the price of LPG cylinders by Rs 145-150. At the same time, for those who avail the LPG subsidy, it has increased the subsidy amount by almost the same amount — from Rs 153.86 per cylinder to Rs 291.48. 

READ: LPG price hiked by Rs 144.5 per cylinder, subsidy also almost doubled

What does this mean for you?

Fuel retailers sell LPG cylinders at market price, but the government subsidises up to 12 cylinders per year for each household by direct cash transfer. So, if you are an LPG subscriber who avails the subsidy and consumes 12 cylinders or less a year, the additional outgo from your pocket will be marginal. On the other hand, if you are one of about 1.03 crore people who gave up the LPG subsidy following Prime Minister Narendra Modi's appeal to 'Give Up' the subsidy, you will take a hit. Not only did you give up the subsidy, but the market price of LPG cylinders has also gone up continuously since you did so. 

But international crude prices have stayed range-bound this year and have even seen a sharp decline in the past month. Why this price hike? Why now? 

Good question. Truth is, the government has been increasing LPG prices at frequent intervals, but by small amounts. Thus, LPG price had already gone up by Rs 140 since August 2019 before this latest hike. With this week's hike - the highest one-time hike in six years - it has gone up by almost Rs 300 since August 2019. One explanation for it is that the government wants to give some relief to State-owned oil companies, whose finances have deteriorated since 2014, thanks in part to the government's own handling of them. Why now? There is no definitive answer for that But observers have noted a pattern of oil companies keeping fuel prices low before elections and hiking them immediately after. The latest hike has come just after the Delhi election. 

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In that case, why increase the subsidy amount? What will be the impact of this on government finances? 

India has about 24.72 crore LPG subscribers, of whom only 1.03 crone people have given up subsidy (January 2019 figures). Thus, the vast majority of subscribers - 96% of them - continue to depend on subsidised LPG. The government perhaps felt the need to cushion them against the price hike. If the latest price hike had not come with the corresponding increase in subsidy, there would have been no impact on the government's fiscal position. The 1.03 crore people who pay the full price will pay an additional Rs 150 crore together per cylinder each, or Rs 1,800 acre for 12 cylinders a year. Thanks to the increase in subsidy for the rest, the government will pay out about Rs 3,278 acre in direct cash transfers per cylinder each, or close to Rs 40,000 crore for 12 cylinders a year delivered to each such household.