India to Review LPG Subsidy Formula as US Imports Raise Costs

The government is preparing to revise the way liquefied petroleum gas subsidies are calculated after state-run oil firms agreed long-term purchase contracts with US exporters, sources told The Economic Times. The proposed change seeks to reflect a new supply mix and higher shipping costs tied to US-origin LPG, which could alter the fiscal burden on the centre.

India LPG subsidy formula under scrutiny

Until now the subsidy for household LPG has been determined with reference to the Saudi Contract Price, the benchmark for supplies from the Middle East. Oil marketing companies argue that the Saudi benchmark no longer captures the economics of cargoes arriving from the United States, which attract far higher freight charges.

Industry officials say shipping LPG from the US to India costs almost four times as much as transporting the same cargo from Saudi Arabia. That disparity means US LPG is commercially viable for India only when it is offered at a significant discount. With Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum signing one-year supply agreements for roughly 2.2 million tonnes of US LPG beginning in 2026 — around 10% of India’s total LPG imports — the question of how subsidies are calculated has become pressing.

Household LPG retail prices are capped by the government. When state-controlled sellers incur losses by supplying LPG at those regulated rates, the centre compensates them through subsidy payments. Changing the subsidy formula to incorporate US prices and higher freight could raise the government’s subsidy bill, according to analysts and officials familiar with the discussions.

Trade ties and fiscal trade-offs

The move to include US supply in long-term procurement follows a broader uptick in India’s crude and LPG purchases from the United States. October data from Kpler showed India importing about 540,000 barrels per day of US crude, the largest flow from that source since 2022. The shift in sourcing partly reflects diversifying supply lines and ongoing diplomatic engagement with multiple partners.

At the same time, US officials have pressed India to reduce oil purchases from Russia in response to the invasion of Ukraine, and trade tensions have bubbled up in recent months. Indian policymakers have insisted that decisions on energy procurement will be guided by national priorities, including affordability and energy security.

What to expect

If the government adopts a revised subsidy formula that factors in US LPG prices and higher shipping costs, retail pricing and the fiscal subsidy outlay could both change. Consumers might see a slower rise in domestic prices if policy makers opt to shield households, but that would come at a higher cost to the exchequer. Alternatively, a partial pass-through of costs could reduce the subsidy burden while marginally raising retail rates.

Officials say consultations are under way with oil marketing companies and finance ministry advisers. Any decision will seek to balance energy affordability for households with prudent public finances as India integrates a wider range of global suppliers into its fuel mix.

Reporting by The Economic Times. Image credit: Business Standard.