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Allow market forces to shape destiny

The Modi government took courage to decontrol diesel pricing last month, thanks to falling crude oil prices.

Today petrol and diesel are sold in some kind of free markets with minimum political interference. Only PDS kerosene and residential LPG are still subsidised.

Since the three public sector oil companies still use the same old formula to fix the prices and also because of potential collusion among them, in reality there is no competitive market.  As a result of the government policy of subsidising petrol and diesel when oil prices were increasing since 2004 and limiting it to public sector oil companies, private companies like Reliance, Essar... had to close their world class service stations. It will take some time for these private players to build their service station network to compete with the public sector companies.

 

Liberalise gas pricing…

However, in an equally important but less visible natural gas market, the strong hand of government is still continuing to guide its destiny the Modi government. Instead of liberalising gas sector performed even worse than the UPA government. After some delay the government decided to junk the UPA recommendation of increasing the gas price to $8.20 per million BTU. Instead it lowered it to $5.61 per unit. Still most of the comments in the media concentrated only on the price being a ‘massive’ increase of 25 per cent.

There was not much interest on the part of the public, political leaders or energy experts to question the rationale behind regulating the gas price, fixing an unjustified formula and its potential impact on future gas exploration, increasing gas imports, falling gas demand, etc. Most concentrated on the potential inflationary impact of $1.41 increase in gas price.

No doubt electricity, compressed natural gas used in autos, piped natural gas used for cooking, and fertilizer price will increase. However at the national level inflationary impact will be negligible since gas use in these sectors is not significant.

 

Formulas with little sense...

The NDA dumped the UPA formula and came up with one of its own. But both formulae were irrational with the NDA’s being worse. The UPA based its price on the gas prices prevailing in the US and UK and LNG import price of Japan and India. Most of these gas markets, with the exception of LNG prices, were irrelevant to India.

NDA worsened the situation by dropping the more relevant benchmarks and based it on markets unconnected with India! In addition they took the gas prices prevailing in Canada and Russia. But for NBP of the UK, all other bench mark prices reflect gas markets where there are plenty of gas reserves, cost of gas production is low and all of them are gas exporters. None of these conditions is relevant for India. It is clear that they wanted a political price which would be less than the one recommended by UPA.

 

Free markets should decide price…

If the government is really serious in increasing gas production and reducing gas dependency, it should have allowed the gas prices to be determined by free market.

Even in the US gas prices were controlled for a very long time and it was liberalised only in mid 1980s. When gas prices were controlled, the US also had a huge deficit of gas. In the US, thanks to shale revolution, gas prices fell as to low as $2 per unit. Why are we refusing to learn from the US? Free market can work wonders in India as it did in the case of aviation and telecom.

One reason is that the gas sector liberalisation is likely to benefit Reliance and any government implementing such a policy will face political criticism even if it is sound economics. Unfortunately such trust deficit of one company is preventing a business-friendly government in taking the right decision. If we want to usher in a new era of gas exploration, there is an urgent need to liberalise gas sector and allow the market forces to shape its destiny.

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