Deconstructing The Fuel Pricing Reforms

The Indian Government has made a bold move to shed a substantial portion of the subsidy burden it has carried for decades. Costing almost USD 10 billion annually, the Government has decontrolled diesel prices and secured itself additional ground to finance development in critical areas such as infrastructure. Government’s decision factored on weakening international crude oil prices which touched a 4-year low of $83 per barrel. Now diesel prices will be purely market driven. The prices of diesel at retail outlets immediately become cheaper by Rs 3.35 a litre. The diesel price decontrol will reduce the fuel subsidy burden and create a level playing field for the private fuel retailing sector government-owned marketing companies.

As part of the much awaited fuel reforms, the NDA Government raised the natural gas price to USD 5.61 per mmBtu .The new formula will be effective November 1 and rates will be revised every six months with the next revision being on April 1. The Government has modified the Rangarajan formula approved by previous United Progressive Alliance (UPA) Government to bring down the increase in rates from USD 8.4 to USD 5.61.

Undeniably, gas price revision and diesel price deregulation are speculated to face some challenges, viz,

  • The lack of clarity on the premium Government will pay for new discoveries in deep sea can dampen the investor sentiments.
  • The natural gas price increase will result in CNG prices going up by Rs 4.25 per kg and piped cooking gas by Rs 2.6.
  • Every dollar increase in gas rates will lead to a Rs.1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff.
  • Some power generation companies are concerned that electricity distributors will curb demand for gas-fired supplies.
    The revised price guidelines may not benefit existing players.
  • The price hike for domestically produced natural gas will push up production cost of fertilizer companies by almost Rs 2,720 per ton.
  • The new price falls short of expectations of state-run companies
  • De regulation of diesel prices should not mean giving OMCs the freedom to fix retail prices based on import parity costs.

The gas pricing will bolster the investor confidence and put economy on the recovery path. It will have a defining impact on India’s energy security matrix.

  • The chief beneficiary of the increase in the gas price will be state owned companies which produce about 85-90% of the gas production in this country.
  • The new price rise will dispel policy ambiguities and improve investor sentiment. The decision will provide tremendous boost to the next round of oil/gas block auction.
  • The Government will get additional revenue of Rs 3,800 crore annually.
  • Deregulated diesel prices will significantly improve the country’s finances as the oil subsidy will come down by Rs 15,000 crore.
  • Cascading effect across the economy on everything from bus and rail fares to vegetable and fruit prices.