Managing natural resources is never an easy job, but the Indian government seems to mismanage more often than not. The latest example involves a new deal for natural gas from the Panna Mukta Tapti (PMT) fields in Gujarat, an important fuel in short supply — consumed by the power and fertilizer sectors and several small industries. A significant shortage of gas, besides the government’s approach of setting out supply priorities on a sectoral basis, has only compounded the issue.
The seeds of the problem were sown in the 1990s when the government negotiated the PMT contract with the British Gas (BG), RIL and ONGC combine — under it, the government is the sole buyer of gas at a price determined by a formula. And the formula reaps a bounty in a rising crude market. So, a few years ago, the government threw up its hands and struck a deal with the PMT consortium — it could sell some gas in the open market, while the rest would be sold at a lower price by GAIL, its marketing agency. Implicitly, this meant a subsidized price from the market benchmark.
Quixotically, the government recently implemented its threat to buy the entire produce from the consortium, at a much higher price due to the high crude prices. Why? There were triggers — the consortium was selling more than it was entitled to; besides, BG was selling gas to its city gas distribution firm in Gujarat at a price lower than GAIL’s procurement price (fuelling to suspicions of transfer pricing). But, was it reason enough to revert to the contract where the price of gas rises by around $1 per mBtu?
The real reason seems to be the government’s bid to implicitly determine the end users — euphemistically called the gas utilization policy. The policy clearly distorts market forces and price signals. Also, the ability to subsidize the power and fertilizer sectors only improves through cross-subsidy from industrial consumers of PMT gas, who will end up paying as much as $16 per mBtu.
The Centre’s decision comes at a time when state power sector regulators are driving state-owned power utilities to reduce cross-subsidies across consumer segments. But, the Centre does not seem to be practising what it preaches. The current decision is akin to the oil bond story — it doesn’t reveal the true extent of its subsidies in its books.
Only, this one is far more subtle. Since the fertilizer feedstock cost is paid out by the Centre as part of the fertilizer subsidy bill, cross-subsidy by the industry means partial transfers of this burden to certain other consumers of PMT gas. This obviously can happen only in a shortage situation. So, is the government trying to play Robin Hood? Not really. Robin Hood made no personal gains, but the government has vote banks on its mind, with the general elections not far away.
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