God forbid if Chidambaram had his way with gas prices today

Sheela Bhatt gets the inside story of the Cabinet Committee on Economic Affairs meeting that finally decided to steeply increase the price of natural gas. Sources say that Finance Minister P Chidambaram wanted the price to be increased almost three times to $11 per mmBtu.

There was a two-hour heated discussion for and against the hiking of gas price from the current $4.2 (about Rs 252) per million British thermal unit to $8.4-8.5 (about Rs 504-510) per mmBtu at the Cabinet Committee on Economic Affairs meeting on Thursday, according to a source privy to the event.

The increase in gas prices would increase power bills in Indian households, fertilisers would become costlier making agro-food expensive, and CNG transportation costs will shoot up.

However, the Indian public by and large should thank heavens that the price rise was only 100 percent and not more.

A senior source in the government, while talking off the record to rediff.com, said, “If Finance Minister P Chidambaram and Planning Commission deputy chairman Montek Singh Ahluwalia had their way the price of gas would have been fixed at $11 (about Rs 660) plus for next three years and not five years as done now. The gas producing company wanted a fixed term of three years only, for which the finance ministry was agreeable. The gas producers wanted the next review to be undertaken by 2017, which would make a mockery of the entire exercise because the government earns out of such fixed-term price deal only after three years.”

The senior source said, “It was a shocking discussion that took place in the Cabinet. Most of the honourable members have no idea what their decision means to the common man. Maybe, most of them are not keen to fight the elections.”

The source added, “It is astonishing that the Indian Cabinet approves something worth billion of dollars without realising its actual impact on the ground. The Cabinet note (circulated before the meet) had mentioned the price of $11 plus too. That’s mind-boggling. There is no analysis given from the point of view of consumers. How will any Indian household pay triple the price for power?”

The source added, “There is no doubt that the decision clearly favours producers more than consumers.”

The source said, “It’s true that the price of gas was to be revised because it was not done since the last four years and it was due next year. By next April, the government was bound to revise the price. But the $6 (about Rs 360) plus price recommended by the petroleum ministry was good enough. Why is a company, which completely defaulted in producing gas, being favoured?”

Chidambaram has been arguing in favour of gas producers, which include Reliance, that since the price was too low their production was also low. The fact is that there was no incentive to produce more for the gas exploring companies at the four-year old price. It was a clear violation of agreed terms. The Manmohan Singh government believes that Reliance and the government-owned Oil and Natural Gas Corporation needed an incentive so that the import bill comes down and precious foreign exchange could be saved. The reduced import bill would help control inflationary forces too and the government will get huge revenues as production increases.

But, it is a story of the chicken and egg. Critics like Gurudas Dasgupta of the Communist Party of India argue that the corporate sector didn’t produce enough in the last couple of years because they waited for the situation to turn in their favour. They wanted higher prices. They forced the government to import more at a higher price and then they quoted the terribly high import price of gas to get a hike in domestic prices.

There is no doubt that slack production by Reliance, for whatever reasons, cost the exchequer millions of rupees, says a senior Congress leader.

In the eyes of the petroleum ministry at least, Reliance should have been a defaulter. But now they have been favoured by this decision, Dasgupta adds.

Much before the CCEA took the somewhat dubious decision as proposed by Petroleum and Natural Gas Minister Veerappa Moily, Dasgupta told the media, “The collusion of the minister with the corporate is clear. He wants to condone the criminality of underproduction and consequent damage to the Indian economy and allow the corporate to grab 6,000 square kilometres (of gas fields) in violation of the contract." Dasgupta, repeatedly, claims that Reliance allegedly lost interest in production at the old price and preferred to wait for the review that took place on Thursday.

Dasgupta has also exposed Moily's "dubious claim" that oil and gas import lobbies threatened him and his predecessors.

In view of the fact that the issue involves billion of dollars, rediff.com’s source in the government and a senior member of the Congress party said, “It requires audacity of the highest order to go to the Cabinet and ask for $11 plus price for gas, which will ruin the common man.”

On Thursday, Prime Minister Manmohan Singh kept mum, as that’s the way he has been in most of the Cabinet meetings. He was totally surrendering to the idea of his friend and advisor C Rangarajan, who headed the committee to review gas prices. According to highly reliable sources in the government, given a choice the Rangarajan Committee on production sharing contract mechanism in the petroleum industry would have preferred the hike of $6 plus but in the committee some members, who allegedly had an agenda to pursue, prevailed upon the others for the final decision. Every single dollar increase means spiralling impact worth million of dollars on the economy, positive and negative.

The CCEA not only disagreed with the petroleum ministry’s suggestion to keep the price at $6.775 (about Rs 406) mmBtu but even overlooked the clear disadvantages to the consumers at large which should have been of paramount importance to the government whose credibility is dwindling even as elections come closer.

The new price will come into effect from April 1, 2014.

In the Cabinet, Minister for Science and Technology Jaipal Reddy, Minister of State (independent charge) for Power Jyotiraditya Scindia and Minister for Fertilisers and Chemicals Srikant Jena opposed such a steep hike, but the rest of them went by the decision that would impact every single Indian and have implications running into billions of rupees.

The power ministry will face an impact of around Rs 25,000 crore and if the Chidambaram-backed price formula had been accepted the impact would have been above Rs 50,000 crore on power producers who will be forced to buy gas at the higher price.

There are many logical reasons given for such a seemingly anti-aam admi move.

The most-often cited argument is that it will bring in foreign direct investment which is very vital to the sector.

A day after the price hike, Chidambaram said at a press conference, “The only way to correct this (more investment in the gas sector) is to give a reasonable price which will attract investment. For every unit of gas that we do not produce, it does not mean we are not consuming that gas. We are importing that one unit.”

The imported gas price is three times the domestic gas rate and importing gas was unsustainable for the Indian economy, Chidambaram said.

“The choice is to live without gas or to produce gas, because the third alternative of import is simply not sustainable,” he said.

Nobody can dispute the argument. But, a former petroleum minister told rediff.com, “This argument can’t be the moving force behind the decision. Internationally, India is not perceived as a country rich in hydrocarbons as, say, Azerbaijan is. We are fooling people. There will be some investment here and there, but India is not likely to get big-time investment for its gas reserves.”

The government’s press release says their decision “will help incentivise investment in the Indian upstream sector, so that production reaches optimum levels and all exploitable reserves are put to production expeditiously. At the same time these guidelines will ensure that producers do not cartelise because of the huge unmet demand. This will protect consumer interests.”

The government argues that higher production will bring down India's dependence on imports. India is currently the world's fourth-biggest importer of fuel. There is no doubt that there are strong reasons for the hike in gas prices. The approved recommendations, known as the Natural Gas Pricing Guidelines 2013, will remain valid for five years, says the government.

The crux of the matter is that when the price for five years was fixed in 2009, domestic produces defaulted on production. This cost the exchequer more than Rs 1 lakh crore if the higher import bill is taken into account. No strong action has been taken yet on the defaulter companies. The government’s calculation behind the new hike can be justified only if gas production rises to meet India’s growing demand for a full five years.

In the short term this rise favours ONGC and Reliance and reduces the burden on foreign exchange reserves. In the long term the deal helps the country. But, the deal inked in 2009 showed that before the advantages start incurring to the country, if one party fails to adhere to the terms, in the long run the government does not show any spine to take action.

What is the guarantee that after enjoying the price hike from April 2014 onwards, the Indian gas producers will not default in their production again much before the next review in 2019? They have tasted blood. It’s precisely here that the United Progressive Alliance government lacks the credibility and spine needed to take stringent action for violating norms and compensate the loss to the exchequer by fining the defaulters.

On Thursday, the same CCEA that took the decision of gas pricing policy under the New Exploration Licensing Policy made a meagre hike of only Rs 60 per quintal in the Minimum Support Price of paddy. It has retained the MSP of jowar and urad without any increase from last year’s levels and made very meagre increases in the MSP of bajra, moong and arhar.

According to Ramchandran Pillai, president of the All Indian Kisan Sabha, “None of the MSPs announced reflect the increased costs of production or the expectations of the farmers. The MSPs announced are unfair and un-remunerative and will act as a disincentive to farmers."

He added, “This government is doling out free gifts to companies like Reliance and promoting unbridled profiteering, while simultaneously putting the lives of farmers in peril.”