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Government may go for $5.5 per unit gas price in case of backlash

Wednesday, 25 June 2014 - 7:00am IST | Place: New Delhi | Agency: dna

After hiking rail fares, the government is set to bite another bullet: domestic gas price hike.

Over past three days, senior ministers and officials are working out a formula to make the hike as moderate as they can to avoid cascading effect on inflation and essential commodities.

The UPA government had committed to implement recommendations of the C Rangarajan committee to hike gas prices by about $8 per million metric British thermal unit (mmBtu).

Finance minister Arun Jaitley and oil minister Dharmendra Pradhan, along with top officials discussed the issue with the prime minister on Sunday and Monday.

A petroleum ministry paper presented to the PM, which is being discussed over past three days, has sought the price at $6.4 per unit. Sources said the PM asked the officers to review it once again. Officials told dna that a formula was being worked out under which the private players would be allowed to use ONGC infrastructure to give them an advantage so they would feel comfortable to charge $6.4-6.8/unit.

Insiders said since the hike will have cascading effect on power and fertilisers, and indirectly on farm products, there will be protests. The issue which may give a handle to the opposition to disrupt the Budget session of parliament. Keeping in mind the reaction from its own MPs also, the government has also kept a scope of reducing the gas price, which it may bring down to $5.5 per mmBtu.

A senior BJP source told dna, that a margin is being kept. It should be noted that the Yashwant Sinha committee on finance had suggested that the gas prices not be decided in a jiffy and rather be discovered after a complete audit.

No final word, meanwhile, has come from the |PMO yet. In its exercise of fixing the gas prices, the PMO has called a meeting of the oil ministry once in next few days, in which a decision may finally be taken. Reliance, too, has not agreed so far in the negotiations.

Currently, GAIL pays a subsidy to the government for using some gas that is priced below market prices under administrative price mechanism. If the gas prices become market linked, GAIL might not have to share subsidy burden with the government. Officials said another alternative to applying the Rangarajan formula from July 1 is restricting the higher price to additional output, which would incentivise production while also protecting the interests of consuming industries like power and fertilisers.

Reliance Industries will be major beneficiary as it would be in a position to hike production. It is believed that increase of $1 in gas price would mean increase of Rs 1,370 per tonne in urea production cost and a 45 paise per unit increase in electricity tariff. There would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas. If the Rangarajan formula is implemented without changes, power tariff will rise by about Rs 2 per unit and CNG rates will jump by over Rs 12 per kg..

The Rangarajan formula calls for pricing rates at an average cost of importing liquefied natural gas into India and rates prevailing at international hubs in the US and UK as well as the price of gas imported into Japan. Sources said there is a thought that high-priced Japanese imports, which have no relevance to India, should be excluded from the formula to limit the gas price increase to about $7-7.5 per unit.

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