India is a huge LPG retail market. The number of registered customers reached 100 million in April 2008. Annual sales are close to 12 million tons and growing at 5-6 percent per year. However, this market is being supported by Government price subsidies on household cylinders, subsidies which have caused market distortions and resulted in the illegal diversion of the subsidized LPG for home use to the non-subsidized commercial sector.
The LPG Subsidy Program
The Government maintains a subsidized LPG price (below free market levels) for households in India because it is politically popular to do so and politically dangerous to take it away.
The Government has talked about abolishing the subsidy program. But it still persists. One reason that it does is that it doesn’t cost the Government that much. The 14.2 kg cylinder was subsidized to the consumer by 236 Rs per cylinder ($0.42 per kg) in 2007. However, the Government bore less than 10 percent of this subsidy cost (as opposed to half of the subsidy cost five years ago). The subsidy burden has passed to the state-owned oil companies (OMC’s) who now bear more than 90 percent of the subsidy cost through under-recoveries. In effect, these OMC’s have been cross-subsidizing LPG from their other product sales.
Illegal Diversions
Two years ago, there had been widespread reports of illegal LPG cylinder diversions from the subsidized household sector to the unsubsidized commercial sector. The Government instituted a clampdown. They sent inspectors around the country to monitor the monthly sales patterns of LPG distributors and dealers and see if there were any unusual distortions that might have been the result of these illegal diversions. This action did seem to have some effect at the time.
Piped Gas and Subsidized LPG
Now, the problem has resurfaced again, this time as a result of the introduction of piped gas into Indian cities. In Mumbai and Delhi, consumers who are now receiving piped gas have been returning their unwanted cylinders to LPG distributors. But the LPG distributors in many cases, it would appear, have been continuing to take their allocated subsidized LPG which they have then been reselling to the higher-paying commercial sector. The differential between commercial and household LPG prices is so large that their profits are sizeable. As the Government has been complaining, these profits are all coming out of their subsidy program.
Two measures are under consideration:
Rolling back the scheme for distribution of subsidized LPG in every area where piped gas connections are provided.
and drawing up a scheme for focused and direct subsidization for LPG to consumers living in rural and backward areas which are not covered by piped gas networks (and thereby, as Indonesia is planning, replacing their use of subsidized kerosene).
The measures would be politically popular. It is argued that “subsidized LPG would be more likely to reach the targeted people, instead of unjustified supply to affluent sections of society in urban areas who are cashing in on the double subsidy benefit.”
However, the first step is not without its problems. LPG distributors in urban areas lose their business as the gas grids expand. In Mexico, this resulted almost in warfare between the local mainly family-run LPG distributors and foreign-run gas distributors who were invading their turf. Indian officials believe they have to look after the local LPG distributors in some way "so to not face possible resistance or even sabotage of the piped gas networks."
This article appeared in Poten's monthly research report on LPG in World Markets. For information about this publication, please click here or contact Colin Shelley at cshelley@poten.com.
