dna edit: Faulty logic

Contrary to what finance minister P Chidambaram or petroleum and natural gas minister Veerappa Moily might say, the move to hike natural gas price — currently pegged at $4.2 per million British thermal unit (mBtu), to be raised to $8.4 per mBtu from April 1, 2014 — is unlikely to be any sort of real solution to India’s gas woes. The objective is sound enough; to boost investment in the gas sector, enabling more exploration as well as infrastructure construction.

But while the move will certainly boost revenues for both state-owned and private players — Oil & Natural Gas Corp (ONGC) and Reliance Industries Ltd, among them — its sustainability is suspect. For one, there is likely to be concurrent rise in the subsidy burden from the fertiliser and power sectors that the government must absorb. For another, the logic of deciding price by averaging prices at international gas trade hubs is problematic.

With elections coming in 2014 — and the price rise kicking in just about then —  political compulsions are likely to ensure that the government doesn’t allow a greater burden on end consumers. Chidambaram has already indicated as much, saying that gas input price for the fertiliser and power sectors could be fixed later. The implications are clear; hiking gas prices is unlikely to have any substantial economic benefit. The government’s burden from subsidising ONGC’s underrecoveries will go down, but it will simply be offset by greater subsidies at the other end of the chain.

Nor is there a clear chain of reasoning in pegging gas prices at international rates. The price levels at which gas is sold internationally have little bearing on domestic production and sale rates; there are any number of factors that make market conditions completely different. If the logic is to allow domestic producers to compete on equal footing by selling gas at international rates, that is a price far better determined by the market — where competition may well drive down prices — than by fiat. The latter presupposes consumers’ willingness to absorb gas supplies at a uniformly high level and ignores the possibility of substitution by coal.

That would be high undesirable. As matters stand, just about 10 per cent of India’s energy needs are met by gas. Coal accounts for about 60 per cent of India’s energy needs — and is the far dirtier fuel. The aim should be increase the former’s share at the latter’s cost. And the best way to do that is not by having the government administer prices but by building a true domestic gas market —  something that is entirely missing at the moment given the government’s Gas Utilisation Policy and a fragmented market — and letting it determine rates. That is the best way to incentivise private players.