Liberalise The Space

It was a huge disappointment to those concerned with India’s energy security when the Modi government failed to implement a prog­ressive gas pricing policy. But for the questionable interference of the Election Commission, an earlier policy of doubling gas prices approved by the UPA government would have come into force from April 1, 2014. The last regime had, after much deliberation, decided to implement the Rangara­jan committee recommendation of doubling pri­ces. It realised how lower prices had practically stopped needed investment in the sector.

The doubling of gas prices would result in additional revenues of Rs 33,000 crore a year for gas producers. Public sector giant ONGC would have been the biggest beneficiary; the power and fertiliser sectors, the biggest losers—their additional cost burden Rs 14,000 crore and Rs 8,000 crore respectively. Since both the sectors are highly subsidised, the government finally would have borne the cost. That is the reason why the finance, power and petrochemical ministries oppose the price hike.

However, were the fundamental question of the need for such high subsidies and if they can be avoided or minimised addressed, the government would not need to bear the burden. First of all, a market-based gas price will optimise the production of fertilisers by moving fertiliser manufacturing to low-cost producing countries. A well-managed power sector too would not need to rely on subsidy. A status quo on gas prices would fail to send the right signal to these sectors to improve their performance.

True, there are some problems with the Rangarajan committee recommendation of basing prices on the Henry Hub in the US, the National Balancing Point in the UK and lng price in Japan, markets that are irrelevant to the Indian market. Actually the committee’s preferred pricing strategy was to liberalise the gas market. This aspect, however, has received very little media attention. What did was the limited point about the gas price increase.

Instead, the petroleum ministry has suggested a dual-pricing strategy, where the higher prices will apply only to incremental production. Ironi­ca­lly, this policy may end up favouring Reliance more than PSU oil companies. India could learn from the US experience. Faced with a similar problem in the ’70s when there was a huge gas shortage due to price control, it allowed higher prices only to new production rather than go for full price decontrol, which would have meant a windfall for oil companies. This resulted in a huge mess, with over a 100 classifications of gas, making gas pricing administration a nightmare. Finally, the US was forced to decontrol.

The Modi government would, hopefully, be wiser and bolder. It should drop the proposed dual pricing and implement the more successful policy of liberalising the gas market. Today, India is forced to import lng, paying above $13 to $15 per unit. Liberalising the gas market will contribute to energy security by increasing gas production and reducing lng imports.