If gas price wasnt raised,we would have to contend with constrained supply,expensive imports
For those who had begun to despair of the governments ability to take tough calls,Thursdays decision to hike the price of gas to bring it more in line with global prices using a formula designed by PMEAC chairman C. Rangarajan is reassuring. The move,months in the making,had been criticised by even the power and fertiliser ministries as something that would jack up costs. Every $1 hike in gas price,for instance,raises power costs by around 40 paise; the $4 per mmBtu hike approved from 2014 is estimated to cost the power and fertiliser sector around Rs 15,000-17,000 crore more. Naturally,the opposition,especially among the Left parties,used this as an opportunity to attack the government for being pro-business. The problem with the argument,however,is that it completely misses the point. About 10 per cent of Indias power capacity is based on gas,but just about a fifth of this functions,as the rest of the capacity has no gas supplies. There is a cost to keeping capacity idle. Similarly,in the case of fertilisers,the alternative to local supplies,albeit at costs that are roughly double of those today,is to either import the fertiliser or to import gas at prices of $10-11 per mmBtu. In these circumstances,raising the price of gas was the most logical thing to do. Indeed,it is perhaps the most cost-effective solution.
If,by keeping the price constant,India was able to get greater supplies of natural gas,there would be no problem never mind that some of the biggest beneficiaries of the decision will be the state- owned ONGC and OIL,not just RIL or Cairn. The problem,however,is that it is simply not economical for these firms to invest billions of dollars looking for gas in the deep seas that is where the bulk of the gas is believed to be unless the price is hiked. While it is true that RIL-BP met the prime minister to argue this,even the state-owned ONGC made the same point to the petroleum secretary.
An immediate effect of Thursdays decision will be an increase in the funds that flow into the sector from global players like BP,or others who want a slice of the pie. Indeed,with the government clamping down on the freedom of firms to price their product or to sell it something the private firms thought was guaranteed to them there has been less and less interest in various auctions of oil blocks in recent years. The alternative to raising the price of natural gas was a constrained supply situation. Critics of the cabinet decision need to keep that in mind.