Cooking Gas Prices May Rise Further As Oil Subsidies End By FY22: Report

You may not have noticed it, but the price of subsidised cooking gas rose by an average of Rs 10 per cylinder in the July-January period of current fiscal taking the price paid by common man for fuel closer to market rates.

The good news is that with the developments in the past few months, the government is looking to completely eliminate oil subsidy by early FY22. But for consumers, the move would mean that their cooking gas price would shoot up by another Rs 100-150 per cylinder over the next one year.

Sources said that taking advantage of low oil prices, the government may give nod to state-run oil marketing companies to increase the price of subsidised LPG cylinder gradually so that entire subsidy paid under direct benefit transfer scheme (DBT) to eligible consumers is eliminated in one year's time.

Already during July 2019-January 2020 period, the OMCs have increased the price of subsidized LPG by Rs 63 per cylinder. At current global oil prices, if oil companies raise the rate of subsidized LPG cylinder (14.2 kg) by just about Rs 10 per cylinder per month, there would not be any need to extend Central support in 15 months' time.

The price of a subsidised LPG cylinder (14.2 kg) currently works to around Rs 557, with the government providing Rs 157 as subsidy directly into the account of eligible consumers. The subsidy level may fall if the oil prices slide further and remain below $60 a barrel in most parts of FY21.

"Raising prices of subsidized LPG cylinder augurs well for the OMCs, especially keeping in mind the intended privatization of BPCL. However, the resolve of the government would be tested if oil prices spike," said Motilal Oswal in its latest report on oil and gas sector.

At the end of FY19, the OMCs had total government receivables of Rs 34,900 crore on account of compensation for LPG/kerosene under-recovery. Deregulating LPG would boost the working capital of the OMCs.

The oil marketing companies (OMCs) incurred gross under-recoveries of Rs 43,300 crore in FY19, of which LPG accounted for Rs 31,500 crore (73 per cent). In case of kerosene, the subsidy support has already fallen and with states targeting the flow of fuel through the PDS system, this subsidy could also be taken off.