How is the US-India LPG deal connected to LPG subsidies?

LPG subsidy is like a discount given to people by the Government of India.

It is done to keep the price of LPG cylinders low. It is done to help poor households who are part of schemes like the Pradhan Mantri Ujjwala Yojana.

India is the world’s second-largest consumer of LPG. It relies heavily on imports to fulfil its demand. Currently, over 50% of its needs are imported.

When the global price of LPG goes up, India has to pay more for these imports. So this creates a dual burden for the Government, higher import costs and also higher subsidies.

When the actual market cost of an LPG cylinder is Rs. 1,100, the government protected consumers by capping the price at about Rs. 550.

The government had to pay the large difference, spending over Rs. 40,000 crore in subsidies in one fiscal year to keep the price stable for the public.

How This Deal Benefits India

This deal will help to lock in a one-year contract for a large volume of LPG from the US. It will help to keep supplies reliable and prices stable for Indian households.

At present, most of India’s LPG imports are from the Middle East. By sourcing 10% of its imports from the US, India is reducing its reliance on a single region.

The contract prices the LPG based on Mount Belvieu. It is a main U.S. gas price center. Getting supplies this way helps Indian companies (IOC, BPCL, HPCL) buy LPG cheaply. How?

• The US is a low-cost LPG supplier globally. Reason? Shale boom. 
• The Middle East supplies LPG on FOB terms. With the US, India can import LPG on a “delivered pricing model” in which the final price a buyer pays for a product includes the cost of transportation and delivery. This way India can reduce its shipping costs and uncertainties.

This reduces the financial burden on the Indian Government when it hands out subsidized cooking gas.