On 13 September 2012, the Indian government announced the notification of a major change in the way LPG subsidies are administered, capping the number of subsidized domestic cooking gas cylinders at six per year per household. The move, aimed at limiting the financial burden of subsidies on the oil companies, was widely expected by the industry. The issue of subsidies is highly political in India and the move attracted enormous media attention – and pressure to raise the cap. This reform is already having positive knock-on effects for the Autogas sector.

Background: the situation before the reform

Domestic use of subsidized 14.2 kg cylinders accounts for close to 90% of total Indian LPG consumption of more than 15 million tonnes annually. Up to 35% of India’s LPG has to be imported, so subsidies constitute a huge drain on national resources: the oil-subsidy bill totalled more than 835 billion rupees (Rs), or US$16 billion, in the fiscal year 2011-12.

Before the reform in September 2012, the number of subsidised LPG cylinders available to domestic consumers was unlimited, with actual consumption ranging typically from 15 to 25 cylinders per connection per year. In reality, consumption is even higher, as some households have more than one connection – despite the efforts of the of the LPG distributors of the public sector undertakings (PSUs) to rationalise distribution. And many of these subsidised cylinders are being diverted illegally to commercial uses and as Autogas. Not only is this augmenting the cost of subsidies on the public purse, it is also highly dangerous.

Diversion of subsidized LPG to use as Autogas

The exact scale of the problem is not known as no official figures are available. But a simple comparison of global statistics with those for India suggests that a very large amount of LPG is being used illegally as Autogas.

Globally, 21 million vehicles run on Autogas, consuming about 23 million tonnes. In India, there are close to 2 million vehicles on the road that are able to run on Autogas (though some estimate put the real figure at between 2.5 and 3 million vehicles). Applying the average consumption of Autogas per vehicle worldwide to India yields a figure for total annual Autogas consumption of around 2 million tonnes. Yet the official figures for Autogas use based on sales from formal refilling stations is barely 350 000 tonnes.

Of course, average consumption per vehicle in India may be somewhat lower than that in the rest of the world, especially in view of the congestion problems that India suffers from, which restricts mobility in towns and cities. But it is nonetheless pretty obvious that diversion of LPG is taking place on a very large scale.

The impact of the reform on Autogas

Under the notification, every household shall be entitled to a maximum of six subsidized LPG cylinders per year. They are currently sold at a fixed price of around Rs 450. Households may consume more than six cylinders per year, but they must pay a higher non-subsidized price for the additional ones. At prevailing international LPG, the unsubsidised price would be about twice that if the subsidised prices, i.e around Rs 900. Each household is entitled to one connection only.

At current prices, retailers lose approximately Rs 10 per litre of diesel, Rs 32 a litre of kerosene and Rs 478 per subsidised cylinder of LPG. After the imposition of the cap on the number of cylinders, the demand for subsidized LPG grew by only 2% year-on-year in September and October 2012, compared with 6.7% during the same period in 2011. By contrast, sales of non-subsidized LPG in the same two months in 2012 jumped by 17.4% compared with 1.4% growth in 2011.

The introduction of 6-cylinder cap is expected to reduce the government’s import-subsidy bill by in excess of Rs 60 billion (over US$1 billion). The reform will also open up commercial opportunities for the private sector and limit the volume of subsidized LPG available for diversion to other uses, including Autogas. There are already signs that this is happening: Autogas sales in October 2012 rose by an impressive 20% compared with the previous month.

Another aspect of oil-subsidy reform process in India is the roll-out of the Aadhaar card scheme (UID Card, National Unique Biometric Identification Programme) in 51 districts across 15 States across the country, starting on 1 January 2013. The scheme, which allows a direct transfer of cash to poor households, aims to cover the entire country by the end of 2013. As the subsidies are better targeted, the scheme is expected to save the government another US$ 2-3 billion.

The silver lining!

The reform has inevitably come under attack and talk of raising the ceiling on the number of subsidized cylinders has increased. Yet even if a review were to happen, it would be largely symbolic. Major changes, if any they were to happen, would have happened within a few weeks of the initial announcement.

I suspect that the government will indeed concede an increase in the cap, possibly to nine cylinders per year. But even if this does happen, the positive impact on the industry – and on public finances – would still be very significant.

The fact remains that the government has finally bitten the bullet on LPG Subsidies. It has altered the dynamics of the Indian LPG market and given a major boost Autogas demand.  With this shot in the arm, Autogas in India seems to be back on the path to sustained long-term growth!

For more information about Autogas and LPG more generally in India, please do not hesitate to contact Suyash Gupta at suyash@vsnl.com.