CHENNAI: The government is weighing a revision of the formula used to calculate subsidies on domestic cooking gas as higher-cost imports from the US begin to alter the economics of India’s LPG supply chain. The move comes after state-run oil marketing companies signed long-term contracts to source liquefied petroleum gas from the US, marking a significant diversification away from the Middle East, which has traditionally dominated India’s LPG imports, reports said quoting official sources.
At present, the subsidy payable on domestic LPG is calculated with reference to the Saudi contract price, the long-standing global benchmark that reflects the cost of supplies from the Gulf region. This benchmark has worked reasonably well when most of India’s imports came from West Asia and freight costs were relatively stable and low. However, US LPG is priced on a different benchmark and involves much longer shipping routes, resulting in significantly higher freight and logistics costs. Industry executives argue that continuing to rely solely on the Saudi contract price no longer captures the true landed cost of LPG being sold in the domestic market.
Under the new supply arrangements, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation will collectively import around 2.2 million tonnes of LPG annually from the US beginning in 2026. While this accounts for roughly a tenth of India’s total LPG imports, it is large enough to materially influence the cost structure of oil marketing companies, especially during periods when global prices are volatile. US LPG is typically economical only when offered at deep discounts to offset the higher trans-Atlantic freight, and these discounts are not always available. When prices rise or discounts narrow, the gap between the benchmark used for subsidy calculations and the actual cost incurred by companies widens.
This mismatch has implications for both government finances and the balance sheets of oil marketing companies. Domestic LPG prices are politically sensitive and have remained largely unchanged for extended periods despite fluctuations in global energy markets. When companies are forced to sell cylinders below cost, they accumulate under-recoveries that are later compensated by the government through budgetary support. A formula that understates the true cost of imports risks increasing these under-recoveries, eventually translating into larger compensation payouts from the exchequer.
Officials familiar with the discussions indicate that any revision of the subsidy formula would aim to better align it with the evolving import mix rather than trigger an immediate increase in consumer prices. The government is keenly aware that LPG affordability is critical for millions of households, particularly beneficiaries of the Ujjwala scheme, for whom even small price increases can affect consumption patterns. As a result, policymakers are likely to tread cautiously, balancing fiscal realism with social considerations.
From a broader perspective, the push to import LPG from the US is also tied to India’s strategic objective of diversifying energy supplies and deepening trade ties with Washington. US suppliers have abundant LPG availability, and long-term contracts provide a measure of supply security. However, this diversification comes at a cost, and the debate over the subsidy formula underscores the trade-offs involved in reducing dependence on a single region.
For oil marketing companies, a revised formula that factors in alternative benchmarks and higher freight costs would provide greater clarity and reduce uncertainty around future compensation. For the government, it would mean more transparent accounting of subsidy liabilities, even if it results in higher outlays during periods of elevated global prices. The final shape of the revised formula, if approved, will therefore be closely watched by markets, energy companies and consumers alike, as it will signal how India plans to manage the rising complexity of its energy imports while keeping household fuel affordable.