Government to partially withdraw LPG subsidy in two phases

The central government will phase out subsidies for Liquefied Petroleum Gas, or LPG, that is widely used for cooking purposes across the country, sources said on Tuesday.

To begin with, the government will first withdraw all LPG cylinder subsidy to members of Parliament, state Legislative Assemblies, and all gazette officers, the sources told NDTV Profit. In the second phase, subsidies to families earning at least Rs50,000 a month will be withdrawn. They will now have to pay full price for LPG cylinder. Additionally, MPs and MLAs and Class-I government officers will be allowed to buy 19 kilogramme cylinders at full price, which is currently about Rs1200.

The move, aimed at deregulating LPG prices and reducing the subsidy burden on the government, will become effective. The two-stage move is expected to save an estimated Rs 5,000 crore in LPG subsidies. In 2011-12, the subsidy on LPG is estimated to be about Rs.25,000 crore.

The move is the first strong signal in the new fiscal that the government is committed to cutting its expense bill. Admittedly, a Rs 5000 crore cut will not make much of  a dent in the Rs5.13 trillion deficit -- about 5.1 per cent of GDP -- projected for fiscal 2012-13. Oil imports are the single largest component of India's trade deficit.

What it does instead is send a message to the markets that the government is not afraid of taking hard decisions; indeed, the targeting of key policymakers -- MPs, MLAs and gazetted officers -- but keeping lower-income groups within the subsidy net suggests that the government is clamping down on abuse of the subsidy system. 

Additionally, it will use the unique national identity card project, known as Aadhaar, to implement the partial deregulation process.  

The Finance Ministry is in consultation with the Petroleum Ministry on the subsidy withdrawal, the sources said.

There are about 12.5 crore domestic LPG connections in the country. Finance Ministry calculations show that each household uses an average of 8 cylinders annually.

Currently, state-owned oil marketing companies report under-recoveries of Rs 480.50 per cylinder of LPG. The central government offers an additional Rs22.58 subsidy on each cylinder.