Gassed up

The Supreme Court,asked to rule on the validity of a private deal between two brothers in the presence of a contradictory deal with the government,has spoken: the memorandum signed between Anil and Mukesh Ambani in which Mukeshs Reliance Industries Limited agreed to supply to Anils Reliance Natural Resources Limited a fixed amount of gas at a fixed rate was not binding. The governments claim on revenue from the natural resources,it said,superseded it. This long-awaited verdict will now be mulled over for some time; the markets have already responded,with RNRLs stock taking a beating and RILs price climbing.

But the larger question of where this leaves gas,and natural resource policy,is what should concern us most. The court has clearly reiterated that the states sovereignty extends to the natural resources at its command. This is a valuable reminder,in a week when we have revisited,for example,the implicit loss to the exchequer in not leasing out another resource,the 2G telecom spectrum,properly. But what would be disastrous is if it were read,as initial reports suggest some in government might be happy to do,as a validation of a return to state-administered pricing at every step of the way. After all,there are two crucial aims for any natural resource policy. The first is that the windfall profits from the exploitation of natural resources should go to the state. This is essential to discourage rent-seeking and to ensure the efficient allocation of exploitation rights. The second is that the pricing mechanism be fair and predictable,giving every possible investor a satisfactory return on their investment. Without that,we simply wont get the quantum of investment that is needed in these sectors to develop them properly.

The Supreme Courts judgment,therefore,moves forward on the first,providing solid legal grounding. On the second,however,the state needs to move,in each sector. In the gas sector this fraternal dispute has managed to hold up investment for years,creating uncertainty about the future policy climate,and further constraining an energy-starved economys development. The first response that the government must have,thus,to the judgment,is to welcome the end of this judicially required time of waiting,and to move forward on creating a predictable,market-determined,and remunerative form of pricing for gas.