Power and fertiliser costs will rise, so will government revenue
When the Cabinet Committee on Economic Affairs meets tomorrow to decide on whether or not to hike prices of natural gas, and if so by how much, the topmost figure on its mind is the impact on electricity and fertiliser costs. With the power sector using around 10 billion cubic metres of gas every year, hiking prices from $4.2 per mmBtu to $8 will mean an additional annual outgo of R7,500 crore. In the case of the fertiliser sector, the costs will rise by around R8,800 crore based on its usage of gas. Which is why, the petroleum ministry is toeing the middle line and, instead of the $8 recommended by the Rangarajan committee, is pushing for a $6.7 price.
While that may be neither here nor there in terms of what it will do to encourage fresh exploration with top players like RIL-BP making it clear it is not economical to do deepwater exploration at that price, the other issue that needs to be kept in mind that government revenues will also increase as a result of the hike. According to a calculation done by Barclays Equity Research—see our graphic on page 1—each $1 hike in natural gas prices will yield $551 million to the government by way of increased royalties, profit shares as well as higher dividends and corporate taxes. A $4 hike, which is what is being recommended, will give the government $2.2 billion (R13,000 crore) more, which is a large part of the increased costs for both power and fertilisers. A very small hike in power tariffs will take care of the rest. Add to this the hike in the earnings per share of PSUs like ONGC and Oil India, and there’s a clear win-win including for banks who have lent to gas-based power projects that are lying idle right now due to unavailability of gas—prices of imported gas, always an option, are far higher than the price being proposed by Rangarajan for domestic natural gas supplies. As for the current account deficit, it will benefit from lower imports that will result from increased domestic supplies as well as the higher FII/FDI flows that will result once investors believe the government still has the stomach to take tough decisions.