Font size:
Print
Hike in LPG Prices and Excise Duty
How LPG price hike will help OMCs offset under-recoveries
Context: The government raised LPG prices by Rs 50 per cylinder last week and increased excise duty on diesel and petrol by Rs 2 per litre despite crude oil prices falling to $63-64 per barrel. This move aims to help public-sector oil marketing companies (OMCs) offset losses from subsidised gas prices.
How Is the LPG Cylinder Price Calculated?
- The price of a Liquefied Petroleum Gas (LPG) cylinder is determined based on the Import Parity Price (IPP) formula. Since India imports a significant portion of its LPG requirement, the IPP reflects international market trends.
- Benchmarking: The IPP is linked to Saudi Aramco’s LPG prices, primarily denominated in US dollars.
- Conversion: The dollar price is converted to Indian rupees.
- Add-ons: Additional costs are factored in, including: Free on Board (FOB) price, ocean freight, insurance, customs duties, port dues, inland freight, bottling & marketing costs, dealer commission, and GST.
- The cumulative figure determines the retail selling price of non-subsidised LPG, which is revised monthly.
Impact and Purpose
- The hike also applies to Pradhan Mantri Ujjwala Yojana (PMUY) beneficiaries.
- Petroleum Minister Hardeep Singh Puri stated the hike is part of periodic reviews to align with global fuel market trends and offset rising import costs.
- The price increase supports the profitability of three major OMCs—Hindustan Petroleum, Bharat Petroleum, and Indian Oil Corporation—which faced under-recoveries of nearly Rs 43,000 crore on domestic LPG sales.
- The hike is expected to reduce under-recoveries by Rs 10,000 crore for FY25-26.
Excise Duty Hike: A Parallel Support Strategy
- Excise duties on petrol and diesel were increased by Rs 2 per litre.
- The hike compensates OMCs for losses on LPG sales despite rising international prices.
- Expected increase in excise duty collections for FY25-26 is Rs 35,000 crore.
- Despite the excise hike, OMC marketing margins remain healthy due to a recent crude oil price drop from above $77 to $63-65 per barrel.
- Factors contributing to the crude price drop include fears of a global recession, retaliatory tariffs by China, and planned OPEC+ production increases.
Subsidy Burden on Government
- As of December 2024, India had 32.89 crore active LPG customers, with over 10.33 crore under the PMUY scheme, receiving a ₹300 subsidy per 14.2 kg cylinder for up to 12 refills a year. A smaller subset (5 kg connections) receives a proportionately adjusted benefit.
- The ‘Give It Up’ campaign has seen 1.15 crore higher-income households voluntarily forgo their subsidies as of February 2025.
- While petrol and diesel prices have been deregulated, LPG subsidies remain a key fiscal item. The subsidy outlay has changed over the years:\
- FY23–24: ₹12,240 crore (including ₹1,460 crore via DBT)
- Revised FY24–25: ₹15,700 crore (₹500 crore DBT)
- Budgeted FY25–26: ₹11,100 crore (₹1,500 crore DBT)
Import and Consumption Trends
- India imports 60–65% of its LPG requirements. In January 2025, LPG imports rose by 10.3% year-on-year to 1.82 million tonnes (mt), though they dropped 2.2% month-on-month, according to the Petroleum Planning & Analysis Cell (PPAC).
- LPG consumption surged by 7% in 2024, driven by: Low international prices, General elections, and Increased rural consumption.
- However, 2025 may see a slowdown in import growth as residential demand eases. This is due to policy shifts toward piped natural gas (PNG) and biofuels, as LPG penetration nears saturation, per a March 2025 report by Drewry, a maritime research consultancy.
- Nearly 97% of India’s LPG imports came from the Middle East in 2024. Middle Eastern LPG is butane-rich, suitable for India’s 60:40 butane-propane blend in residential cooking gas.
- However, ongoing US-China trade tensions could push China to source more LPG from the Middle East, potentially raising Saudi CP propane prices and increasing India’s import bill.
Flexi-Fiscal Policy Approach (Economic Survey 2021–22)
- The Economic Survey 2021-22 underlined the importance of a flexible fiscal approach in managing post-pandemic economic recovery.
- It refers to the agile fiscal strategy adopted by the government instead of a rigid, front-loaded stimulus, India opted for a calibrated, adaptive approach that evolved based on the situation.
- Key Aspects:
-
- Initial Phase: Focused on safety nets for vulnerable sections, including direct benefit transfers, emergency credit for small businesses, and food subsidies.
- Recovery Phase: Shifted towards demand stimulation, with measures like Production Linked Incentives (PLI), infrastructure investment, and increased capital expenditure.
- Adaptive Strategy: Unlike the waterfall approach (which relies on pre-determined plans), India’s flexible fiscal response allowed for continuous adjustments based on real-time economic conditions.
- This approach has been recognised globally, including by the IMF Fiscal Monitor (October 2021), as an effective way to navigate economic uncertainty
