UPA and dodgy gas pricing Sadly Kejriwal is saying nothing new

If Arvind Kejriwal is making strong allegations against how gas prices are being fixed, and how Reliance may be benefitting at the cost of the economy, the UPA government has largely itself to blame. In announcing a dubious way of fixing gas prices last year, the government made itself vulnerable to such charges. As we noted in Firstpost last year, there was no tearing hurry to announce a decision for 2014 back then, 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. Real reform is what the US did with shale gas, which is to free exploration and domestic pricing. You don’t fix prices through a government and call it reform. If you fix prices, instead of letting the market determine the price, you are likely to be accused of collusion with businessmen. You have handed a propaganda coup to Kejriwal – whose remedies are unlikely to help reduce energy prices either.
Among the follies announced last year were the decision to fix KG gas prices at around $8 per mmBtu based on a complex formula. There is no reason why pricing should be announced in dollars. 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? Moreover, 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. The pricing decision announced last June, and especially the explanation given by Finance Minister P Chidambaram, involved gas output prices and not input prices for user industries – which meant the government had 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. 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. Then, 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. The UPA’s intentions appear suspect and mala fide – and it didn’t need a Kejriwal to tell us this. If the benefits of a gas price hike are to be had upfront 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. 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 last year; it also needed 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. But reform cannot be about meeting these kinds of goals. Or pandering to FIIs. 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. 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. 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 last June. Real reform is what the US did with shale gas.And we didn’t need Kejriwal – an anti-market rabble-rouser – to remind us of this.