UPA's gas price move isn't reform, it is a ticking time bomb

The UPA has passed off mind-boggling foolishness as “reform” and the stock markets have had their weekly shot of adrenalin, with the Sensex soaring 520 points yesterday.

The celebrations will be short-lived, for the government’s decision to double natural gas prices from $4.2 per mmBtu to $8.4 per mmBtu from April 2014 is neither reform, nor sensible politics, nor good economics.

Here’s why.

First, there was no tearing hurry to announce a decision for 2014 right now, when a government may change, and the entire global energy scenario may be different. Not only has the UPA tied down the next government to a seriously flawed decision, but its motives in doing so are also suspect.

[caption id=“attachment_915351” align=“alignleft” width=“380”] Real reform is what the US did with shale gas. Sorry, Mr Chidambaram, we can’t buy this.[/caption]

Second, there is no reason why pricing should be announced in dollars - when the rupee is 60 to the dollar. Remember the criticism of the Enron deal? Why price power in dollars when the revenues are all in rupee? The same logic should apply to the Indian gas pricing scene. Why should the Indian consumer, and possibly the taxpayer, take on the exchange risk of India-produced gas?

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Third, this is simply not reform. How can a committee- or bureaucrat-decided price be called reform? Do bureaucrats know better than the market? If the logic for allowing a price increase is that import prices are higher currently, one wonders what would happen if global prices crash? The only move that can be called reform is market-based pricing - where businesses take both the risks and rewards of global and domestic price movements.

Fourth, the move is clearly anti-reform, if one goes by Finance Minister P Chidambaram’s statement yesterday. He said that the government had fixed output prices and not input prices - meaning it has decided how much money gas producers, ONGC and Reliance among them, will make, but not how much gas users (power, fertiliser consumers) should pay. This is utter stupidity.

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Chidambaram said: “At the moment we are fixing only output prices, the price payable to gas producers. This will indeed have an impact on the consumer, but those prices are not being fixed today…..What is the price at which it should be supplied to a power plant, to a fertiliser plant, in order to make power affordable, fertiliser affordable… that can still be decided between now and April 1 (2014).”

This begs the question: if input prices for power and fertiliser can be decided later, why rush to decide output prices nearly a year in advance? When the two are inter-linked, it’s like trying to have your cake today, and leaving the job of cleaning up the mess to someone else in 2014.

Fifth, any fixing of input at a lower price than output price will mean a bloating of subsidies. Who will pay this? The taxpayer, or somebody else? In the case of oil subsidies, both taxpayers and public sector oil companies have carried the can for the government’s political decisions. Will the same happen with gas now? Will ONGC and GAIL bear the subsidies? This would be a disaster, and a clear case of misgovernance. ONGC shareholders should be suing the government if that happens.

Sixth, the UPA’s intentions appear suspect and mala fide. If the benefits of a gas price hike are to be had upfront (which is what the markets are celebrating) and the costs will be shifted to the next government (which will have to take the painful decision of bearing more subsidies, or reducing the gas price at the output end), this is clearly a scorched-earth policy. The UPA has essentially lobbed a ticking time-bomb to the next government.

Seventh, and this could be the government’s real motive, it appears that the gas price announcement was intended to achieve two non-reform goals of the UPA: given the drastic fall in the rupee, the government needed the market to perk up in order to reverse capital outflows; it also needs a buoyant stock market to meet its fiscal deficit target. These targets can be met only if public sector shares can be sold to investors. In June, foreign institutional investors sold equity and debt to the tune of over Rs 40,000 crore. The gas price announcement temporarily reversed that trend yesterday. But reform cannot be about meeting these kinds of goals. Or pandering to FIIs.

Eighth, even if gas pricing is intended to induce new investments in petrocarbon exploration, it cannot be done in isolation. The energy sector comprises oil, gas, coal, coal-bed methane and shale gas, too. If you want to reform the sector, you have to reform pricing in all of them, not just gas. By raising gas prices, and leaving other prices and sectors as they are, the government is clearly worsening its energy sector problems. The only way to reform is to let prices of fuels find their own levels, so that businesses can make a rational decision on which fuel to use for what kind of output.

Ninth, the doubling of gas prices is widely seen as a favour to gas producers. It may well be that, but in the long-term, it will actually damage the gas sector. When you double prices by fiat, the chances are that gas users will go into losses; they will have to be rescued either by the taxpayer or banks. And future demand for gas-based fertiliser and power plants will be curbed. Who will the gas producers sell to then?

In the US, when the government decided to boost shale gas production, it did not set any price. The market did that. This brought in new investment, and competition - and today natural gas prices at the US’s Henry Hub are below $4 per mmBtu. And here we are, trying to double that price and calling it reform.

The goal of any policy should be efficiency and competition, not guaranteed profits or losses to any stakeholder. As TN Ninan askes in his weekly column in Business Standard: “Is any more proof needed that India’s reforms, so-called, are business-friendly rather than market-friendly?”

It is difficult to believe that the UPA’s gas price move was at all intended to reform anything beyond putting out the fire in the economy’s backyard - where the rupee was clearly going down in flames.

Real reform is what the US did with shale gas. Sorry, Mr Chidambaram, we can’t buy this.

(Disclosure: Firstpost is published by Network18, whose promoters have received funding from the Reliance Group)