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Is The Decrease In Corporate Tax A Reason For The Increasing LPG Prices?

The consumption level of LPG among the people got a massive surge after the Pradhan Mantri Ujjwala Yojana Scheme in 2016. According to the report published by the Petroleum Planning and Analysis Cell, an arm of the Ministry of Petroleum and Natural Gas, the penetration level of LPG reached almost 97.5% in 2020.

The recent NSO report states that nearly 61% of the households in India used LPG in the year 2018.

Source: Business Standard

The data confirms that LPG is about to or has almost become a necessary commodity of a household. The Pradhan Mantri Ujjwala Yojana Scheme aims to empower women, provide healthy cooking fuel and avoid the environmental hazards and health issues caused by fossil fuels.

But due to the rise of LPG prices, the kernel motive of the scheme comes under question. In this article, we will discuss the price changing trend of the LPG and the hidden reason for the increase in the price rate.

The Average Price Of LPG Is Highest In 5 Years

In 2021, LPG prices in India have climbed 49%, which is less than the 62% gain in international benchmark prices. The price of liquified petroleum gas (LPG) cylinder increased by ₹25 on 1 September, taking the price of a non-subsidized 14.2 kg cylinder in Delhi to ₹884.50. The cost of a commercial (19-kg) cylinder was increased by ₹75 taking it to ₹1,693.

This is the seventh time cooking gas rates have been raised in 2021, which has added ₹190 to the price of a 14.2 kg cylinder in Delhi.

This news came as a big blow to citizens, especially those who were financially weaker. An increase in the price of LPG will hurt millions of low-income families as the government has also gradually lowered support after eliminating the LPG subsidy last year.

The graph below indicates the difference between a non-subsidised LPG and a subsidised LPG that will become almost zero by 2021:

Source: Rajya Sabha/media reports/PPAC

The price of LPG is decided based on an import parity price (IPP) formula, which is based on international product prices. Saudi Aramco’s contract prices are considered a benchmark for this calculation. The IPP formula includes Saudi Aramco’s LPG prices, free-on-board price, ocean freight charges, customs duties and port dues.

The rise in global price plays a significant reason for the spike in the Indian rate.

Average LPG Price Over 5 Years (In Delhi):

Source: Lok Sabha

Price Build-Up:

Source: PPAC

Hidden Motive:

India imports more than half its LPG requirements. Additionally, it is also a fact that LPG production happens in the country to a certain extent. So, it is debatable whether the import parity pricing mechanism is the best way to price the fuel. IPP is calculated by including the Free On Board (FOB) price, ocean freight, customs, dues, etc.

The same fee has been charged even for the cylinders produced inside India. Also, the breakup charges were not transparent and were not uploaded in Petroleum Planning and Analysis Cell (PPAC) since 2019. Without proper updates, people are unaware of import charges, freight charges, margins, etc., of the LPG imported from Saudi Aramco.

Source: Rajya Sabha/media reports/PPAC

From the above chart, it is more intuitive that until march 2021, India had priced the petrol in accordance with the Saudi Aramco price level. But from April to August 2021, the Government of India was reluctant to decrease the LPG price. The concrete reason is yet to get answered.

To answer the above question, we must introspect the problem from a different perspective. The Government of India had lowered the base corporate tax rate to 22% from 30%. This was expected to lead to a loss of ₹1.45 lakh crores. So, the government had pre-planned to match the loss incurred, which was expected to occur.

Therefore, to compensate, the surplus of the RBI of ₹1.76 lakh crores was handed over to the government after a lot of controversies. But slashing the corporate tax backfired heavily. The actual loss that occurred is speculated to be around ₹2.09 lakh crores. The revenue loss was more extensive than expected.

This loss might have moved the government to adopt a coercive action to generate revenue from other means. One of the perfect examples is the surge in the price of petrol over the past year.

But in the case of LPG, the actual reason for the increase in the cost of LPG has not been explained by the government to date. Considering the importance of the welfare delivery process, we expect the state to become answerable to the raised questions and to make use of the LPG penetration with a positive approach.

Authors: Sowmiyanarayanan S is a student of Amrita Vishwa Vidyapeetham and Naveen SR is a student of Madras School of Economics

Featured Image via Wikimedia Commons
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