Logic of market reforms PDF Print E-mail
Friday, 27 June 2014 08:36
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No option but to hike prices all along the chain

Given the flak it got for raising railway fares, and the rollback it made in the case of even the hugely subsidised suburban railway fares in Mumbai, it is easy to understand the government’s reluctance to nearly double prices of natural gas immediately, more so given the possibility of a drought and what that will do to inflation levels. An increase in gas prices, the government fears, will immediately translate into a hike in electricity and fertiliser prices. Problematic as that is for a government, however, that is the logic of market reforms—increase prices at any part of the chain, and you have to increase it everywhere, otherwise the system simply goes bust. It has in Delhi, for instance, where, since the regulator did not pass on tariff hikes to customers, electricity suppliers don’t have the finances to carry on.

Over even the short-term—the decision on gas prices has been postponed for three months—however, the government has no option but to hike prices. If this is not done, supplies will not rise. In which case, the government’s only option is to either curtail production or import at even higher prices which, in any case, will get passed on to users. India imports around 30% of its natural gas at $11-12 per mmBtu, not raising prices for local suppliers will mean higher imports. While the power minister has said he doesn’t see why global prices should be paid for local production, it is important to keep in mind even the ONGC chief has said he can’t explore for new gas at current prices—being a PSU chief, however, he has been careful not to get into the specifics of the Rangarajan formula and the problems that ministers in the government say it has. Since imports are more costly than local supplies—imported gas needs to first liquefied, then shipped and regasified—it makes most sense to incentivise local production.


While India imports around 30% of its gas needs even right now, the figure is almost 77% in the case of oil. Even though paying private sector Cairn the market price of around $96 per barrel for its oil in FY14 ensured it produced 11 million tonnes of oil—that’s nearly 30% of indigenous production—the import bill was still a whopping $165 billion in FY14. Imagine what this would be if India was not paying Cairn the market price, and the firm decided it would not do business in India? A similar situation obtains in the case of coal where the minister is trying to extract whatever extra he can from Coal India and trying to get it quicker environmental clearances. While that is important, given that India already imports $16-17 billion of coal each year, and the way demand is growing, there is no option but to bring in private players—and given that, as in the case of oil, private players have the option of investing anywhere in the world, you will have to pay global prices. That, in turn, will mean hiking electricity prices all along the value chain. Presumably that’s what the prime minister had in mind when he said tough decisions—that would turn people against the government in the short run—needed to be taken.


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