Hiking gas prices shows reforms still on the agenda
Though the government dilly-dallying over critical clarifications on multi-brand retail FDI has given the impression it had developed cold feet over vital reforms, Thursday’s decision to hike prices of natural gas suggests reforms are back on the agenda, while trying to find ways to make them palatable. A look at the share prices of ONGC and RIL, the two principal beneficiaries of the Cabinet decision, makes this clear. When the markets opened, ONGC was up 10% as compared to 5% for RIL since the PSU major sells a large part of its gas at vastly subsidised prices under what is called the administrative price mechanism. Later in the day, however, as the finance minister said the government would find ways to keep prices low for gas supplies to the fertiliser sector, and it was obvious ONGC would be asked to supply gas cheap to certain sectors, ONGC ended the day 3% up versus RIL’s 3.8%. What the government did was a two-fold move. Given the large gap in domestic availability—imports are projected to rise from 19% in FY11 to 28% by FY17—and that imported gas costs around $10-11 per mmBtu, it was important to incentivise producers to ramp up production. Indeed, it is not just RIL-BP, even ONGC had said it couldn’t invest billions of dollars exploring for gas in the deep seas at the current price of $4.2 per mmBtu—lack of freedom to domestic players to price and market their oil/gas has also been one of the reasons why there is less private sector interest in each successive oil/gas block auction. So while raising the price nearer to market-determined levels will get back investor interest—and hopefully billions of dollars of FDI—getting ONGC to share part of its gains will make the move politically palatable.
It is unfortunate ONGC will be asked to shed part of its gains, but if it helps get a critical reform through, it is worth the price. Even without the gas hike, the PSU would have had to share a higher part of the subsidy burden thanks to the rupee’s slide. The extra amount it needs to bear to keep fertiliser prices down depends on what the government chooses to do. The extra $4 or so that gas producers will get per unit of production means a healthy increase in government revenues due to higher royalties as well as taxes—estimates are this will be around R10,000 crore versus the R9,000 crore or so more that the fertiliser subsidy will go up by. So, if the government chooses to do its maths correctly, ONGC may not have to shell out anything extra. As for the impact on electricity companies, if the impact is shared across all 900 billion units of power generated, the required tariff hike of 7-8 paise per unit is easily absorbed. The important thing, for now though, is that gas supplies will rise and ensure expensive power capacity is not kept idle; and foreign investors, especially in the capital-intensive oil sector, will be reassured that India still means business.