All you wanted to know about LPG pricing formula
Last week, the Centre raised the price of non-subsidised LPG (liquefied petroleum gas) for the fifth month in a row. The 14.2 kg non-subsidised LPG cylinder now costs ₹714 in Delhi, up ₹140 since August 2019. The LPG pricing formula could see the popular cooking fuel’s price head higher, if the recent flare-up in US-Iran tensions takes a turn for the worse.
What is it?
LPG pricing in India is done on the basis of a formula — import parity price (IPP). The IPP is determined based on LPG prices in the international market, assuming that the fuel is imported into the country.
The IPP, based on Saudi Aramco’s LPG price, includes the FOB (free on board) price, ocean freight, insurance, custom duties, port dues, etc. This price, quoted in dollars, is then converted to rupees. To this is added the cost of inland freight, marketing costs and margins charged by the oil companies, bottling charges, dealer commission and the GST. This gives the retail selling price of the non-subsidised LPG cylinder for the Indian customer. The price of LPG cylinders in India is reset on a monthly basis, effective from the first of every month.
Ergo, an increase in international LPG prices or weakness in the rupee, or both, translate into higher LPG price in India — which we have been seeing over the past few months. International LPG prices tend to move in tandem with the price of crude oil, the key raw material. The recent spike in geopolitical tensions in West Asia could cascade into further hostilities, resulting in a jump in the price of crude oil and LPG.
The Centre provides subsidy, through direct bank transfer, on 12 LPG cylinders (14.2 kg) a year per household. So, many customers pay a subsidised rate of about ₹530-550 (current price) per cylinder. The subsidy amount changes month-on-month based on international LPG prices and currency fluctuations. On purchases beyond 12 cylinders a year, the household has to pay the non-subsidised price. A lot of folks have chosen to give up the subsidy under the Centre’s ‘GiveItUp’ campaign. The Centre has also done away with the subsidy for those with annual taxable income of over ₹10 lakh, and was reportedly mulling reducing the threshold to ₹5 lakh.
Why is it important?
India does import more than half its LPG requirement, but the rest is produced within the country. So, it is debatable whether the import parity pricing mechanism is the best way to price the fuel. Among other criticisms, there have been allegations of cartelisation in the pricing of transport fuels (diesel, petrol) and cooking fuels (LPG, kerosene) in the country. All three major PSU suppliers — Indian Oil, BPCL and HPCL — charge nearly the same price, though they have different cost structures and operational efficiencies.
Like it or not, this is how it has been for many years. On the positive side, the streamlining of fuel subsidies over the years helped the Centre fund schemes such as the Pradhan Mantri Ujjwala Yojana. that aims to provide gas connections to the women of BPL (below-poverty-line) families.
Why should I care?
Higher LPG prices eventually pinch you. You either pay more directly — if you have used up your quota of subsidised cylinders or don’t get subsidy at all — or indirectly (through higher taxes), if the Centre bears the burden of higher subsidy resulting in a higher fiscal deficit. Costlier LPG is certainly not good news for the Indian economy, that is already facing an economic growth slowdown.