New Delhi: The government signalled on Friday that it was willing to absorb the increase in prices of natural gas and not pass it on in the form of a hike in power tariffs and fertilizer prices.
“Power has to be produced at an affordable price, fertilizer has to be produced at affordable prices. Those issues will be addressed,” finance minister P. Chidambaram told a news conference in New Delhi, adding prices could be “tweaked” for these sectors.
On Thursday, the cabinet committee on economic affairs (CCEA) cleared the doubling of natural gas prices with effect from 1 April next year. In the normal course, an increase in fuel costs would result in the output costs of fertilizer and electricity prices rising. However, with the government promising that this would not happen, it has implicitly accepted that it will absorb the fiscal cost and thereby push up its burgeoning subsidy bill estimated at Rs.2.6 trillion in 2012-13.
This is unlikely to go down well with either international rating agencies, which have already expressed their concern at the growing fiscal burden of the government, or foreign investors, desperately seeking proof of intent from the government on its commitment to a fresh round of reforms.
Since the general election is due in May next year, the Congress-led United Progressive Alliance (UPA) has effectively bequeathed a fiscal problem to the next regime. Credit rating agency Crisil Ltd said in a research note that, assuming urea prices are retained at Rs.5,360 per tonne, the fertilizer subsidy is estimated to increase by Rs.2,000-2,500 crore in 2014-15 after discounting the accruals of royalty from the sale of gas by around Rs.1,500 crore.
The price at which domestic companies sell gas could go up to a maximum of $8.4 per million metric British thermal units (mmBtu) from the current domestic prices that range between $3.5 (around Rs.210) and $5.73 (Rs.340) per mmBtu and could boost the revenue of gas producers including Mukesh Ambani-led Reliance Industries Ltd (RIL) and state-run Oil and Natural Gas Corp. Ltd (ONGC). The price will still be lower than that of imported natural gas, which costs around $14.17 per mmBtu.
The increase is in line with the recommendations of a committee headed by C. Rangarajan, chairman of the Prime Minister’s economic advisory council, which in December suggested a system that would price the fuel at $8-8.5 per mmBtu.
“Decline in domestic production is resulting in rise in import of LNG (liquefied natural gas). We have to produce more gas,” Chidambaram said, justifying the reason for the increase. “Domestic gas production will go up if investments are made. Currently, no investment is (being) made.”
This will be the first revision in gas prices in three years. The government will have to take a substantial hit subsidizing the price of gas for urea producers.
“This will encourage more investments in exploration and make smaller pools of gas economically viable to produce,” Neelabh Sharma, a Mumbai-based analyst at BOB Capital Markets Ltd, said in a previous interview to Mint. “A higher gas price will also increase the cost of power generation and fertilizer production, and the government will have to take care of that.”
Credit rating firm Moody’s said in a statement that it expects ONGC’s revenue to increase by $1.5-2 billion, and that of RIL by $300-500 million in fiscal 2015, based on their gas production between April 2014 and March 2015.
Other experts said that though the move would stoke inflation, it was unlikely to have any immediate political consequences and the burden would have to be borne only by the next government.
“This is just one among several decisions that the government has taken in recent times to project its reformist image and is a positive signal,” said Kunal Kumar Kundu, an independent economist. “We don’t know the extent of the price hikes, but it isn’t happening this year and won’t affect this government’s political fortunes.”
He added that there was still little clarity on how soon the decision would result in actually increasing gas production. “We don’t even know when these will benefits accrue. Thus, even though the cabinet allows FDI (foreign direct investment) in retail, it’s still difficult for a company to actually invest.”
Meanwhile, the Communist Party of India (Marxist) opposed the move.
“This will have a cascading impact increasing prices and burdening common people, while the main benefit will accrue to a single corporate house,” the party said in a statement on Friday. “The government will pass on much of this burden to the common people. Farmers will have to pay more for fertilizers, the price of CNG (compressed natural gas) used by public transport in many cities will also be hiked, as will electricity tariffs.”
Separately, the Union cabinet also approved setting up an independent regulatory authority for the coal sector and moving the Coal Regulatory Authority Bill, 2013, in Parliament.
In a press note, the cabinet said an independent regulatory body for the coal sector would help efficiently use coal resources and benefit coal companies, coal-consuming industries such as power, steel, cement, and coal-bearing states and people, directly or indirectly associated with the coal industry.
The CCEA also approved the setting up of 10 regional labs, 30 state-level labs and 120 medical college-level labs under the scheme for establishing a network of laboratories to manage epidemics and natural calamities.
The scheme, which will cost Rs.646.83 crore in the 12th Five-Year Plan, will help build capacity for handling viral diseases in terms of early and timely diagnosis, development of tools to predict viral disease outbreaks beforehand, continuous monitoring and surveillance of existing as well as new viral strains, and handling viruses with a potential to be used as agents of bio-terrorism.
To incentivize farmers, the government has effected an increase in the minimum support price (MSP) of kharif crops. The price for paddy has been fixed at Rs.1,310 per quintal, Rs.60 per quintal more than last year.
The prices for jowar (hybrid), jowar (maldandi) and ragi have been retained at last year’s level of Rs.1,500 per quintal, Rs.1,520 per quintal and Rs.1,500 per quintal respectively. The MSP of bajra has been raised by Rs.75 per quintal and fixed at Rs.1,250 per quintal. The price of maize has been raised by Rs.135 per quintal over last year’s Rs.1,310 per quintal.
Reuters contributed to this story.