4 reasons why govt deferred gas price increase

What prevented the government on Wednesday from allowing an increase in the price of domestic natural gas?

On paper, the Narendra Modi government could have allowed the gas price increase, from $4.2 a million British thermal unit to around $8.4 an mBtu, and justified it as yet another act of implementing a decision taken by its predecessor, the United Progressive Alliance government.

After all, it was the UPA government that had decided to almost double the gas price -- it could not implement the decision because the model code of conduct for the general elections was enforced on it by the Election Commission.

When the Modi government had last week announced a sharp increase in railway passenger fares and freight rates, it had said the decision was taken by the UPA government and only implemented by the new one.

. . .

So, why didn’t the Modi government use the opportunity again?

A close examination of the government’s decision-making process shows there were four specific reasons that influenced the Union Cabinet’s Wednesday move to defer a decision on gas prices by three months, to September 30.

First, the government was concerned over the inflationary impact of a hike in gas prices.

In effect, the Cabinet Committee on Economic Affairs endorsed the petroleum and natural gas ministry’s view that an increase in natural gas price would cause a commensurate
increase in the prices of key inputs like fertilisers, petroleum natural gas, compressed natural gas and electricity generated from gas-based plants.

. . .

Second, CCEA agreed with the view that if the government decided to insulate people from the impact of a price rise, the subsidy offered in these sectors would have to be significantly increased.

The move would have had a bearing on the coming Union Budget, in which reducing subsidy is believed to be a key focus area for the new government.

Third, it was also felt that it would be appropriate for the new government, which had come to power only a month ago, to comprehensively re-examine the whole issue of gas pricing before taking a final call.

And fourth, the ministry pointed out that para 1.8 of the guidelines for effecting an increase in domestic gas prices stipulated that such an intent had to be notified in advance on a quarterly basis.

. . .

Also, under para 1.10 of the guidelines, in respect of DI and D3 gas discoveries in KG basin, these guidelines are applicable subject to submission of bank guarantees.

The ministry explained, in view of para 1.8, if the prices could not be notified before July 1, these guidelines needed to be deferred until September 30.

CCEA had approved the first draft of the natural gas pricing guidelines on June 27 last year but, after the finance ministry raised certain questions, it again deliberated and cleared the norms with some modifications on December 19.

These guidelines were notified on January 1 this year which implied the revised gas prices would be applicable from April 1.

. . .

However, the price increase was deferred on the Election Commission’s direction as the model code of conduct for the general elections kicked in from March 5.

At that time, the then petroleum minister, M Veerappa Moily, had approved the proposal that the revised gas prices be notified after lifting of the code of conduct.

According to the notified guidelines, the earliest possible date for a price increase to take effect was July 1.

Also, the gas pricing guidelines of 2014 did not mention the basis of gas pricing -- whether it would be based on gross caloric value or net caloric value.

. . .

The department of fertilisers had said in a letter in March that the pricing formula had been changed by Reliance Industries from NCV to GCV in the gas sales and purchase agreement.

This would automatically increase the gas price by around 10 per cent, without any price revision.

Since the existing prices were based on NCV, Moily had in May sought that a detailed analysis of the issue be conducted -- in line with the Rangarajan committee’s suggestions and the Directorate General of Hydrocarbons’ opinion, in consultations with all stakeholders -- and placed before CCEA for approval.

Accordingly the issue had to be placed before CCEA for a decision.

. . .

On hold
Govt’s reasons

1 Inflation

A hike in natural gas price would have pushed the prices of key inputs like fertiliser, PNG, CNG and electricity generated from gas-based plants, leading to a surge in prices of essential items

2 Subsidy

If the govt decided to cushion consumers from price hike, it would have had to offer more subsidy in some sectors; that would have added to the pressure on the govt's finances

3 Review

Since this govt took charge only a month ago and the groundwork for a gas price hike was done before that, it was felt the new establishment should comprehensively
re-examine the whole issue

4 Guidelines

Para 1.8 of the guidelines require domestic gas price to be notified in advance on a quarterly basis