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Why have LPG prices seen a sharp rise?

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What is the pricing mechanism? What happens to those with subsidy?

The story so far: On February 12, LPG prices, which are revised on a monthly basis, went up again. The rate for unsubsidised, 14.2 kg cylinders has risen by a steep ₹144.50 in Delhi, at ₹858.50. In January 2020, a non-subsidised LPG cylinder cost ₹714 in Delhi. In three other metros too, LPG prices jumped — Kolkata: ₹896 (increase by ₹149); Mumbai: ₹829.50 (increase by ₹145); and Chennai: ₹881 (increase by ₹147). The recent price hike has been the sharpest since January 2014.

What influences LPG prices in India?

Domestic prices of liquefied petroleum gas (LPG) are based on a formula — the import parity price (IPP), which is based on international LPG prices. Saudi Aramco’s LPG price acts as the benchmark for the IPP and includes the free-on-board price, ocean freight, customs duties, port dues and the like.

 

This dollar-denominated figure is converted into rupees before local costs — such as local freight, bottling charges, marketing costs, margins for oil marketing firms and dealer commissions and the Goods and Services Tax — are added. This helps the government arrive at the retail selling price for LPG.

The government resets the LPG price every month, the decision being influenced by international prices and how the rupee has behaved against the dollar in the immediately preceding weeks.

How have international prices behaved recently?

For most of December, the Brent crude price had been on an uptrend, and had breached the $68 level late that month. It peaked at $68.91 in early January, but with the coronavirus (COVID-19) disease hogging headlines in recent weeks, fears of a global slowdown have pushed oil prices down through January, save for a few spikes.

Saudi Aramco had raised its propane prices to $565 per metric tonne in January, up sharply from $440 a metric tonne set for December. Aramco propane prices offer a benchmark for pricing the West Asia LPG sales to Asian markets.

Why have LPG prices seen a sharp rise?
 

The dollar-rupee dance has since been within the range of ₹71-₹72 to the dollar, having briefly breached the ₹72 mark in early January.

Who will the price rise affect?

The price increase will affect retail consumers who have given up the subsidy.

The government has said that for those who avail subsidy, the increase would be mostly absorbed by the rise in subsidy. The Centre said the price of an unsubsidised cylinder would increase from ₹714 to ₹858.50 in Delhi, for example, and that the subsidy offered would go up from ₹153.86 to ₹291.48. Of the 27.76 crore retail consumers, 26.12 crore consumers avail LPG subsidy. Likewise, for Ujjwala consumers, the subsidy would go up from ₹174.86 to ₹312.48 per cylinder.

Does this help the government move to an open pricing regime?

Prior to the latest round of the price increase, the government had raised LPG cylinder prices by ₹62, starting from August 2019. Compare this with the increase of ₹82 that had taken place over five years to mid-2019, indicating a penchant for increasingly lesser subsidy. In the latest round, though, the Centre has sought to absorb much of the increase for those availing subsidy. It looks like the most recent increase has been beyond its control and it is hence raising the subsidy levels to protect consumers, given that the economy is reeling from lack of consumer spending.

What is the outlook?

With international crude prices on the downtrend, it is plausible the LPG prices too would see a slump. Aramco has lowered its propane price for February to $505 per metric tonne. Assuming we receive no surprises from the rupee-dollar tango, a softening of LPG prices in the domestic context may be expected.

What are the implications for the broader economy?

At a time when consumer demand, in general, for goods and services in the country has slumped, more cash in the hands of the retail consumer may have helped spur demand. It is ironic that the government has had to raise LPG prices now.

This sucks away even more disposable income from those consumers who pay market rates for LPG. As a result, household budgets are bound to go up, especially for those not availing the subsidy. The increase in LPG price could spur headline inflation even further. As it is, the consumer price index inflation has seen a rise over the past few months. For January, it had accelerated to 7.59%, compared with 7.35% in December 2019. The January inflation metric was the highest since May 2014, when the figure was at 8.33%.

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Printable version | Apr 4, 2020 3:14:12 PM | https://www.thehindu.com/business/Economy/why-have-lpg-prices-seen-a-sharp-rise/article30831666.ece

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