Even as the ruling Congress party seeks to go populist with a vengeance in the run-up to the forthcoming general elections by enacting a food security law that it hopes will persuade voters to re-elect the incumbent regime, the government has simultaneously taken decisions that will spur inflation and add to complaints of crony capitalism. One such decision has been the move to double the administered price of natural gas, which will greatly help two of the country’s biggest corporate entities -- the Oil and Natural Gas Corporation in the public sector and Reliance Industries Limited in the private sector -- at the expense of ordinary consumers of power and fertilisers (that is, farmers).
The June 27 decision to increase prices of natural gas from US$4.2 per mBtu (million British thermal units) to $8.4 per mBtu saw the Cabinet Committee on Economic Affairs split down the middle. The deep division reflected the ideological fissure within the Congress between the so-called ‘neo-liberal’ advocates of free market capitalism led by Prime Minister Manmohan Singh and the ‘socialist’ faction within India’s ‘grand old party’.
The group whose views prevailed was led by Finance Minister Palaniappan Chidambaram and included Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and, of course, Minister for Petroleum and Natural Gas Veerappa Moily. All them supported a higher price of gas on the plea that this would ‘incentivise’ exploration efforts which, in turn, would result in gas output going up. At one stage, some of these ministers pitched for a $11 per standard unit price of gas against $8.40 per unit that was eventually agreed upon.
Many were surprised at the utterly cynical manner in which this decision was taken and how the interests of corporates were sought to be equated with ‘national interests’. In the process, the government did a policy somersault. The Prime Minister and the Finance Minister have been justifying its policies of aligning domestic energy prices with international prices, be it the prices of petrol, diesel or coal, on the plea that high subsidies are placing an unbearable burden on the exchequer, even if high energy prices have fuelled inflationary fires at home.
In the case of gas prices, however, the government opted for a diametrically opposite strategy. It chose to hike gas prices at a time when world gas prices have plummeted. In addition, Mr Chidambaram has said that there may be a higher subsidy outgo for producers of power and fertilisers. This is indeed unusual for he himself has been among the most ardent advocates of a reduction in subsidies. The expected additional outgo on subsidies on gas-based electricity and fertilisers could well exceed Rs 40,000 crore over the next financial year.
The entire episode seemed to have been choreographed. A committee led by macro-economist Chakravarthi Rangarajan, head of the Prime Minister’s Economic Advisory Council, presented a report that was highly contentious. This committee did not seek the advice of international energy experts. Nor did it give much weight to the views of consumers.
Various questions have been raised that need answers. Why was Reliance Industries not penalised for not drilling the number of wells it was supposed to in the Dhirubhai-6 block in the Krishna-Godavari offshore basin? Was this an important reason why gas output from this block is currently less than one fourth of what had been originally projected -- 80 mmscmd (million metric standard cubic metres a day) against 15 mmscmd at present -- or was the fall in gas production purely on account of geological complexities as has been claimed by Reliance?
There is another important unanswered question. Why was the administered price of gas denominated in US dollars at a time when the exchange rate of the rupee has crashed against the American currency? Even some of the government’s biggest supporters have questioned the rationale of this move.
But the government has preferred to brazen it out.
This article was originally published on July 27, 2013.
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