OMCs to absorb LPG price cut, unlikely to be compensated by government

“There is no thinking within the government to compensate the OMCs for the LPG price reduction,” said a senior government official, requesting anonymity. The official added that LPG prices for domestic household consumers are not fully deregulated, so the companies are required to follow the government’s decision and deal with its financial implications.

Officials with the OMCs said that given the strong financial health of the three companies at present, they should be able to absorb the hit rather comfortably as they had the necessary headroom to accommodate the price cut. All three companies reported robust earnings for the first three quarters of the current financial year 2023-24 (FY24). However, it would have been a different story if they experienced the kind of stress they went through in the previous financial year when energy markets turned extremely volatile in the aftermath of Russia’s invasion of Ukraine.

As per ballpark estimates based on FY23 data on active LPG connections and average refill rates, around 181 crore refills in terms of the standard 14.2-kg LPG cylinders were consumed by households in India in that fiscal. Assuming the LPG refill rates and consumer base remain similar to FY23 levels, the financial impact of the latest price cut would be around Rs 18,100 crore on an annualised basis.

This is the second instance of the government announcing a reduction in LPG prices for households in the current fiscal. Ahead of the Assembly polls in five states, a price cut of Rs 200 per cylinder was announced on August 29.

Usually, the OMCs bear the financial implications of price cuts, while the subsidy bill is footed by the Centre. Currently, LPG subsidy is only provided to poor households under the Pradhan Mantri Ujjwala Yojana (PMUY), and is not available to all household LPG consumers. However, there have been instances in the past when the OMCs sold LPG at reduced prices amid high international fuel price volatility, with the government later providing them with financial assistance to cover the losses they incurred on that count.

For instance, the government provided a special one-time grant of Rs 22,000 crore to the three OMCs in 2022 to compensate them for selling LPG at a loss, which had resulted in accumulated losses of around Rs 28,000 crore. The grant came at a time when the OMCs were grappling with significant losses, particularly in the fuel retail segment due to soaring prices in the international market and the companies’ inability to pass those to domestic consumers. However, the companies have now largely recovered from the losses incurred during that period.