New Delhi: India’s plan to hike gas prices by around one-third as it edges towards market rates promises relief for hard-pressed state energy firms, but will draw flak from fertilizer and small business lobbies worried over input costs.

Speed breakers: Workers loading fertilizer bags at Ladwa, Haryana. The chemicals and fertilizers ministry is opposed to the proposed increase in administered prices for gas as this could inflate the sector’s subsidy bill. Ramesh Pathania/Mint

The oil ministry’s plan for the biggest jump in administered prices ever, and the first in five years, will boost profits for Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd, and generate funds to extend the lives of their depleting oil fields.

“A gas price rise will be a positive signal for the investor community that India is moving towards market-oriented prices, but the only immediate victim would be small industries, which may find it difficult to pass on the rising input cost," said Manish Baghla, a senior manager at PricewaterhouseCoopers.

The hike in the administered price, which applies to the 40% of gas output of 140 million standard cu. m a day (mscmd) that is sold mainly to power and fertilizer firms, is a key step towards reducing distortions in a market with more than a dozen rates.

While power companies can pass fuel costs on to consumers, fertilizer firms get a government subsidy for higher input costs.

“The government wants to cap the subsidy for fiscal management and any increase in input costs will raise the subsidy burden. There will be a problem in allocation of the subsidy," said a fertilizer ministry official. “In 2009-10 the subsidy for the fertilizer sector is fixed at Rs500 billion (Rs50,000 crore) and we are seeing a shortfall of at least Rs200 billion."

So the fertilizer ministry opposes the plan to raise prices in steps.

“In many countries the priority sector gets gas at a cheaper rate. Raising prices in tranches is not a solution," said a fertilizer ministry official, who vowed that the ministry would air its concern over the bid to raise administered prices.

The official, who declined to be identified because he is not authorized to speak to the media, said the ministry would prefer to have the pricing issue for the whole sector examined in a comprehensive way.

A Spanish firm, Mercados EMI, has been hired to study the possibility of a uniform domestic price for natural gas, B.C. Tripathi, chairman of state-run gas firm GAIL (India) Ltd, said last month.

“The gas price note has been tossed around for years and nothing has happened," an oil ministry official said, referring to the plan to raise administered gas prices for ONGC from Rs3,200 per 1,000 cu. m (mscm) to Rs4,142 in the first phase, after an escalation clause for inflation.

“The ultimate vision is to see gas prices aligned more towards the actual fuel value," the official said.

The petroleum ministry is in talks with other ministries about raising the administered gas prices, R.S. Pandey, the ministry’s top bureaucrat, said last month.

However, Pandey gave no timeline for the decision, which will be made by the Union cabinet.

Each $1 per million British thermal units (mmBtu) increase in administered gas prices raises the cost of fertilizer production by around $11.30 (Rs525.45) a tonne, or an annual impact of $200 million, a fertilizer industry expert said.

Gas makes up around 9% of the country’s energy mix, which is expected to rise to around 12% by 2030 as production grows.

But the edifice of administered prices is beginning to creak and could eventually collapse, analysts say.

“Administered prices are not sustainable and are unfair to producers (such as) ONGC and Oil India, especially after the government approved Reliance’s price, which has emerged as a benchmark for new fields," said Praveen Kumar, head of the South Asia oil and gas team at FACTS Global Energy.

ONGC is allowed to charge only $1.80/mmBtu, or one-third of the $4.20 its joint venture with BG Group Plc. and India’s largest private company, Reliance Industries Ltd, gets from supplies of gas from the Panna/Mukta and Tapti fields in western India.

“India has to send out correct pricing signals at a time when the country is paying market prices of $6-7/mmBtu for liquefied natural gas imports," Kumar said.

A 30% increase in administered gas prices would earn additional annual revenue of Rs1,500 crore for ONGC, which sells 94% of its gas at administered prices, the firm has said.

N.M. Borah, chairman of Oil India, which sells around 90% of its daily gas output of more than 6 million cubic metres at administered prices, said his firm’s revenue would swell by up to Rs200 crore, and profit rise Rs100 crore.

With inflation low, raising the price of gas might not drive prices to unbearable levels, one economist said. “There will be some moderate increase in overall price levels due to the rise in power tariffs and CNG (compressed natural gas) prices," said Amitendu Palit, an economist at the National University of Singapore.

India’s key inflation measure, the Wholesale Price Index, was up an annual 1.34% in October, but the fuel index fell 6.56% during the month.

“Since fertilizer prices are controlled, this would imply an increase in central fertilizer subsidies and a concomitant increase in revenue expenditure," Palit added.

“This would create pressures on the Central fiscal deficit, already budgeted at a high level of 6.8% of gross domestic product for 2009/10."