#TheHindu #Editorial Gas pricing and some issues

The government last week announced the new price of natural gas produced in the country, as part of a periodic revision mandated by the new gas pricing formula that it adopted in October 2014. The formula mandates a price revision once every six months on the basis of the prevailing prices in gas-surplus countries such as the United States, Mexico, Russia and Canada. So the new price of $3.8 per unit — in effect from October 1, 2015 to March 31, 2016 — is 18 per cent lower than the previous price. This is likely to hurt producers such as Oil and Natural Gas Corporation and Oil India, but will be welcomed by CNG and PNG consumers, not to mention the government, which will now find its fertilizer subsidy an easier pill to swallow. However, despite the perceived benefits of the new gas pricing policy, there are several issues that come along with it. The first is to do with how the formula is constructed. The price in India is pegged on the benchmark prices of the previous year, and takes effect after a time-lag of a quarter. For example, the price applicable in the period April 1-September 30, 2015 was based on the average benchmark prices over January-December 2014. This means India’s gas prices follow the global cues with a time-lag.

Another point to consider is why the government in its wisdom decided to peg the price of Indian gas to these four hubs. Prices in Asia are higher. The Rangarajan Committee took this fact into account and recommended $8.4 per mmBtu, but it was ignored. Then there is the question that was once raised by Arvind Kejriwal, on why gas prices must be linked to the market if the cost of supplying it in India — namely, out of Reliance Industries’ KG-D6 basin — is a fraction of the market rate. There has been much controversy surrounding this, to no adequate conclusion. One of the most important issues to do with the price of domestic gas being pegged to global benchmarks is that any gains could be offset by losses on account of the rupee’s movement. Several research agencies say the almost 6 per cent depreciation of the rupee over April-September 2015 will mean the net impact of the fall in the price of gas will actually be significantly lower. Gas pricing is a politically sensitive issue, it being a key input in important sectors such as fertilizer and power. Much as in the case of oil, the government has been lucky that prices of natural gas are falling globally. But this could well be temporary: if the global price increases, then the price in India will also eventually increase.

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