LPG cap hike may hit India's ratings

The Cabinet Committee on Political Affairs will take up next week a proposal to increase the annual cap of subsidised LPG cylinders from nine to 12, something that is bound to displease global rating agencies that are closely watching India’s fiscal deficit.

If the government raises the cap, it will put an additional burden of Rs.3,300 to Rs.5,800 crore, or 9 per cent of the budget estimate for total petroleum subsidy, on the exchequer. The outgo will reflect in next year’s fiscal deficit as the subsidy for petroleum products for the last quarter is always paid in the first quarter of the new fiscal year. This means it will be left to the new government after the Lok Sabha election to find the resources to foot the additional bill on account of Friday’s announcement on enhanced quota.

The decision to raise the LPG cap signals a weakening of the resolve to cut inefficient subsidies. In May 2013, Economic Affairs Secretary Arvind Mayaram had told reporters after discussions in New Delhi with global ratings agency Moody’s that its representatives had sought details of the steps taken by the Government to check the subsidy bill and its fall-out on the fiscal deficit. Mr. Mayaram had said: “...it’s not as if the picture is fully rosy... We have said that we know there are problems but ...the government is fully committed to take action so that the problems that we are seeing today are fully addressed.”

The meetings so far had raised confidence of the agencies in India as the Government had taken a number of tough policy measures including deregulation of diesel prices and pruning of subsidies on domestic LPG cylinders, fertilizer and sugar.

Under the nine subsidised LPG cylinder regime 89.2 per cent of the 15 crore LPG consumers are covered. The remaining 10 per cent buy the additional requirement at the market price.

If the quota is raised to 12, about 97 percent of the consumers would be covered by subsidised LPG. Consumers who have already exhausted their quota and would have had to buy LPG at the market price of Rs. 1,258 per cylinder will now get relief in shape of three extra subsidised cylinders in the remainder of the financial year. Subsidised LPG costs Rs. 414 per 14.2-kg cylinder in Delhi.

The quota of LPG subsidised cylinders was raised from six to nine in January last year.