The Government of India is reportedly preparing to approach the Union Cabinet to approve a massive funding package worth ₹32,000 crore to ₹35,000 crore aimed at reimbursing state-run oil marketing companies (OMCs) for under-recoveries they have suffered over the last 15 months on account of selling subsidised liquefied petroleum gas (LPG).

According to government sources cited by CNBC-TV18, this move is intended to support the financial stability of public-sector OMCs like Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL). These companies have been absorbing the gap between the cost of LPG procurement and the subsidised prices offered to Indian consumers, in line with the government’s welfare goals.

The Background of LPG Subsidies in India

LPG (liquefied petroleum gas) is an essential household fuel for millions of Indian families. To make clean cooking fuel affordable, especially for economically weaker sections, the government provides subsidies on LPG cylinders.

Historically, the subsidy burden was borne by the government via direct cash transfers to consumers’ bank accounts under schemes like the PAHAL (DBTL) Scheme. However, in periods of elevated global LPG prices, the difference between procurement costs and domestic retail prices grows significantly, leading to under-recoveries for OMCs.

These under-recoveries are essentially losses incurred because the government directs OMCs to sell LPG at below-market prices without immediately compensating them for the gap.

Why Are Under-Recoveries Rising?

The last 15 months have seen volatile and elevated global LPG prices, driven by:

• Geopolitical tensions, including the Russia–Ukraine conflict.

• Fluctuating crude oil benchmarks influencing LPG feedstock costs.

• Supply chain disruptions and shipping cost escalations post-pandemic.

• Currency depreciation impacting import costs for India.

During this period, the government chose not to fully pass on international price hikes to domestic consumers, especially with inflation already impacting household budgets. Instead, it held LPG prices steady or modestly increased them, leading OMCs to absorb the difference.

Impact on Oil Marketing Companies

OMCs like IOC, BPCL, and HPCL are the backbone of India’s fuel supply. They:

• Import and refine crude oil.

• Procure and distribute LPG.

• Maintain nationwide networks of LPG distributors.

Unreimbursed under-recoveries can strain their working capital, cash flows, and profitability, potentially impacting:

• Investments in refining and distribution infrastructure.

• Capacity to fund green energy transition.

• Dividend payments to government shareholders.

State-run OMCs have reported sluggish earnings in recent quarters, with subsidy burdens weighing on their balance sheets.

Government’s Planned Compensation Package

According to reports:

• The government is drafting a proposal to seek Cabinet approval for a ₹32,000–₹35,000 crore fund.

• This fund will cover the under-recoveries incurred by OMCs over the past 15 months.

• It is designed as a one-time reimbursement to clear the outstanding subsidy arrears.

By compensating these losses, the government aims to:

• Support the financial health of OMCs.

• Ensure continued supply of subsidised LPG to millions of households.

• Avoid any disruptions in domestic LPG availability.

• Sustain government credibility on welfare delivery.

Broader Policy Context: Subsidies vs Fiscal Discipline

Balancing fuel subsidies with fiscal prudence is a persistent policy challenge. Subsidies ensure social equity but can strain government budgets, especially if global energy prices rise sharply.

Key considerations include:

• India’s overall fiscal deficit targets.

• Competing demands for welfare spending in food, fertiliser, health, and education.

• Managing inflation, which could rise if subsidies are cut too quickly.

• Ensuring energy security while maintaining affordability for the poor.

By clearing these past dues, the government may be aiming to reset the subsidy framework ahead of future price volatility.

The Politics of LPG Subsidies

LPG prices are a sensitive political issue in India:

• Rising cylinder prices can spark public anger, especially in urban and rural poor households.

• Subsidies are a key tool to maintain affordability and political goodwill.

• Recent state and national elections have featured debates over LPG prices and subsidies.

By approving a large reimbursement package, the government can neutralise criticism over unpaid subsidy arrears and signal commitment to protecting consumers.

Challenges and Criticisms

While the planned fund addresses past losses, challenges remain:

• Future price volatility may create new under-recoveries if global LPG prices rise again.

• There is no automatic pass-through mechanism to link retail prices to global benchmarks transparently.

• Some economists argue large fuel subsidies distort markets, encourage wasteful consumption, and weaken climate goals.

• The government faces budgetary constraints with multiple demands on its revenue.

Alternatives to Pure Subsidies

Policymakers have considered reforming subsidies to make them more targeted and efficient. Strategies include:

• Direct Benefit Transfers (DBT): Paying subsidies directly into consumers’ bank accounts, reducing leakage.

• Targeting: Limiting subsidies to low-income households while letting market prices prevail for others.

• Tiered Pricing: Offering a limited number of subsidised cylinders per household annually.

• Encouraging Alternatives: Promoting biogas, electric cooking, and solar-powered solutions in rural areas.

These reforms could help reduce fiscal burden while ensuring the poorest households continue to access clean cooking fuel.

OMC Financial Health and Strategic Investments

Beyond the LPG subsidy issue, India’s state-run OMCs face other pressures:

• Energy transition investments in green hydrogen, EV charging, biofuels, and renewable power.

• Refinery upgrades to meet stricter fuel standards.

• Retail network modernisation to compete with private players.

Clearing their subsidy arrears helps free up capital for these strategic goals, aligning with India’s Net Zero 2070 commitment.

Expected Cabinet Process

The proposal to approve the ₹32,000–₹35,000 crore fund will:

• Be prepared by the Ministry of Petroleum and Natural Gas.

• Reviewed by the Finance Ministry to assess budget impact.

• Placed before the Union Cabinet, chaired by the Prime Minister.

• Once approved, funds will be allocated via Supplementary Grants or Budget reallocations.

This process underscores inter-ministerial coordination and the importance of Cabinet’s collective decision-making.

Fiscal Implications for Government

The planned allocation is substantial, and could impact India’s budget math:

• Central Government targets a fiscal deficit of 5.1% of GDP in FY26.

• Subsidy outflows for food, fertiliser, and fuel already form a large share of spending.

• A new ₹35,000 crore outlay will require reprioritisation or additional borrowing.

However, clearing these dues now may avoid larger fiscal shocks later, if OMC financial distress worsens.

Impact on Consumers

For ordinary Indian households, this move is crucial because:

• It ensures continued availability of subsidised LPG cylinders.

• Prevents sudden price spikes that could hurt family budgets.

• Demonstrates government commitment to welfare schemes, especially in rural and low-income segments.

Affordable LPG is central to India’s clean cooking mission, reducing reliance on polluting fuels like wood and dung, and improving health outcomes.

Conclusion

The Indian government’s reported move to seek Cabinet approval for a ₹32,000–₹35,000 crore fund to reimburse OMCs for LPG subsidy losses reflects the delicate balance it must maintain:

• Supporting affordability for consumers.

• Maintaining fiscal prudence.

• Ensuring financial health of critical state-run companies.

• Enabling energy transition investments.

As global energy markets remain volatile, transparent pricing mechanisms, targeted subsidies, and domestic energy production will be essential to manage India’s future fuel security sustainably.

This step is not just about clearing old dues, but about securing India’s energy future in a world where both economic equity and environmental sustainability are increasingly interconnected priorities.

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