Govt’s subsidy pay out to be minimal due to low oil prices

Lower global oil prices have not helped reduce auto fuel prices for consumers but it has saved the government from paying subsidy on cooking gas cylinder into the accounts of household beneficiaries.

From May, the government will not be paying subsidy into the accounts of domestic LPG customers in the metros under the direct benefit transfer scheme. The subsidy will be limited to just Rs 2-5 in other cities given the increased cost of transportation and about Rs 20 per cylinder for 8 crore Ujjwala beneficiaries.

All consumers have to pay the market price of a 14.2 kg cylinder upfront. The government transfers the subsidy directly into the account of eligible consumers. The subsidy is the difference between market and subsidised price of cooking gas.

Global crude oil prices are on a free fall since middle of March bringing down crude prices from a level of $35 a barrel to below $20 for sometime and now to around $25 barrel. Along with crude price fall, product prices, including LPG prices, have also fallen drastically pushing oil companies to cut price of non-subsidised domestic LPG cylinder by a record Rs 162.50 to Rs 581.50 a cylinder in Delhi from May 1.

“At current market price of cooking gas, government may not need to pay any subsidy to households. Only marginal subsidy may be required for Ujjawala customers. If the price trend continues, government could completely eliminate oil subsidy bill in FY21 that could come handy for making additional spending for other Covid-19 related relief measures,” said an official of a country's largest public sector oil refiner and retailer asking not to be named.

The budget had allotted Rs 37,256.21 crore for LPG subsidy in 2020-21– 9 per cent more than Rs 34,085.86 crore in the revised estimate for 2019-20. This requirement should come down drastically with prices coming down.

Apart from LPG, with kerosene prices also currently at low levels and the Centre reducing its allotment to states, the government could look at completely eliminating oil subsidy this year.

Sources said, not only depressed global oil market but oil companies have also been increasing the price of subsidised domestic LPG prices gradually by Rs 4-5 per cylinder since late last year. That has helped to bridge the gap between the market and subsidised price of the product.

According to an analyst report, during July 2019-January 2020, the oil marketing companies increased the price of subsidized LPG by Rs 63 per cylinder, almost at an average of Rs 10 per cylinder per month.

While government has reduced its subsidy bill in the current period of oil price crash, auto fuel consumers have not got any benefit so far. In fact, petrol and diesel prices at the pumps have not changed for last 50 days when global oil prices have fallen more than 40 per cent..