A corporate favour

A day after the Central government took the controversial decision to double the prices of natural gas to $8.4 per British thermal units (mmBtu) from the current $4.2 per mmBtu—which will mainly benefit the Reliance Industries—Union finance minister P Chidambaram has said that it was only output cost for gas producers and the power and fertiliser sectors will be subsidised by the government.

The clarification was obviously meant to mollify the power and fertiliser ministries which had strongly opposed the price hike and to deflect criticism that the move was bound to increase power tariffs and fertiliser prices. But the proposal to offset doubling of gas price with subsidies flies in the face of UPA government’s oft-repeated argument that the subsidies have reached unsustainable proportions and they need to be cut drastically to rein in current account deficit. In fact, in the recent past, the Manmohan Singh government has made the common man’s life miserable by reducing subsidies on the LPG and freeing petroleum prices, which have been constantly going up, thanks to depreciating rupee. 

Reliance Industries which, in a consortium with British Petroleum, is exploring and producing gas in the KG basin, had deliberately cut down gas production demanding higher price. Though the agreement with the government did not provide for price revision till mid-2014, the petroleum ministry pushed the company’s case, arguing that only a remunerative price regime would incentivise gas production. Union petroleum minister Veerappa Moily was severely criticised for batting for a recalcitrant company, but extraordinarily now, the Union Cabinet has approved a higher price than what the ministry had asked for. 

The Rangarajan committee’s price fixation had been considered irrational and on the high side by many, including experts.  Its recommendation, based on a complex formula, in effect suggested payment to Indian gas producers selling gas in India a price equivalent to the post-delivery price of gas in other Asian countries.  It has also been pointed out that the price of gas in some other countries, produced from similar or more difficult fields, is only $6 per mmBtu. A generally accepted view had been that $6 per mmBtu would ensure sufficient returns to a producer. The government obviously thinks that higher gas production will bring greater benefits in future.  It may be true but is only an expectation. For now, the government has made a trade-off between real short and medium term pain and a long-term promise, which may or may not materialise.