Dr Bharat Jhunjhunwala
The Central Government had taken decision to increase the price of natural gas last year. The new price was finally set to take effect from 1st April. The matter was referred to the Election Commission for approval. The Commission ordered that decision on increase in price should be left to the new Government to be formed after the elections. The decision will be favourable for the voters and not-so-favourable for Reliance Industries which is the second largest producer in the country and only significant player in the private sector. About 70 percent production comes from Oil and Natural Gas Corporation (ONGC) and the rest from Reliance.
The controversy is rooted in valuation of a scarce natural resource. The problem is like this. There are only two streams of water in the town which are controlled by two businessmen. Now how do we fix the price of water supplied from these streams? People need water to drink so they will pay a huge price for the same. Open bidding will easily lead to collusion between the two suppliers and they could charge virtually any price they wanted. Competition does not work when players are few. Competition delivers only when supply can be expanded infinitely and there are a number of players. Say, you are looking for a rickshaw at a street crossing. The rickshaw puller demands a high price. This will not work because soon other rickshaw pullers will come and the price will go down. This price reduction will not happen if there is only one rickshaw puller.
There are only two producers of Natural Gas-ONGC and Reliance. Of these ONGC is Government-controlled. Therefore, there is no effective competition. Reliance has a virtual monopoly and can seek whatever price it wants. In any case competition will not work because the supplies are scarce. As indicated by the water example, price reduction from competition takes place only when the supply can expand like in the case of rickshaw pullers.
The Rangaranjan Committee has suggested that price may be fixed by the average of two figures. One, the cost of production of Gas imported by India at the point of production, called ‘wellhead’. Two, the average price of natural gas prevailing in the markets of US, UK and Japan. The problem here is twofold. The true cost of production at wellhead is difficult to assess. For example, RIL has claimed that its cost of production is USD 7 per unit (United States Dollars per Million Metric British Thermal Units). At the same time it has entered into long term contracts with Bangladesh to supply Gas at USD 2.34 for the next 17 years. Companies routinely undertake padding to raise the cost of production in the books of accounts.
The second part of the Rangarajan formula is equally slippery. There is a huge difference in prices in US, UK and Japan. On February 28, 2014 the US price was USD 4.6, UK price was USD 6.6 and Japan price was USD 10.9 per unit. US and UK are gas producers. Of the two, the US alone has a multi-producer multi-consumer gas market hence US prices alone can be considered truly market determined. UK is slowly moving towards a competitive market but has not got there yet. Japan, on the other hand, has no gas production to speak of. Japan prices are essentially price at which suppliers are willing to supply. That price is similar to the price at which India is importing Gas presently. So the inclusion of Japan to determine the global average price is unjustified. I reckon the price will come to about USD 5 if padding of expenditures is removed; and Japan is excluded from the average. The World Bank has projected the global price of Gas to gradually rise from USD 4.2 in 2014 to USD 5.7 in 2020. Hence a price of USD 4 as prevailing presently appears reasonable.
The main argument in favour of an increase in price is that it will attract investment in exploration. But investment is coming in within the present pricing system anyways. The area under exploration was only 11 percent of our basins before private participation in exploration was opened up. It has increased to 50 percent presently. This indicates that present pricing is attractive enough. The slow pace could be due to red tape and corruption rather than pricing deficit.
Another argument in favour of increase in price is that it will speed up receipts by the government. The agreement with Reliance says that the initial revenues will be allocated to Reliance to recover its investments. After this is done, the revenues will be shared between Reliance and the Government. Argument is that a higher price of gas will enable Reliance to recover its investments soon. The revenue accruing to the Government will start sooner than at present. This argument is valid only if prices are kept at present levels. The argument falls apart if prices are raised by imposition of tax. Let us say the Government imposes a tax of USD 4 per unit on gas. The revenue from tax will flow immediately. There will indeed occur a delay in the Government receiving its share of revenues from production but the net receipts from taxes will start immediately and more than compensate for that delay.
To come back to the water supply example. If there is only two suppliers, the way to control fleecing the customers is to impose a huge tax on them for taking water from the stream. Then let them sell water in the market as prices they wish. The tax will prevent profiteering. Therefore, let Gas prices be fixed at USD 8.4 per unit but let the Government also impose a tax of USD 4 per unit. That will prevent profiteering by private players and also increase the price of Gas so as to reduce our consumption to sustainable levels.
The increase in price of gas would be beneficial for the producing companies. Question is whether the Election Commission is justified in putting this on hold? Argument advanced against this decision is that the Commission should interfere only where a decision is targeted to capturing of votes. Such is clearly not the case here because an increase, if at all, will affect the voters adversely. Thus the question is whether the Election Commission should intervene where a decision may affect the voters negatively. Yet, my answer is that Election Commission is right in putting the increase on hold. Task of the Election Commission is to conduct the elections fairly. Whether the impact of a policy is positive or negative is not the question. Any impact is not welcome. Let us, therefore, welcome the decision of the Commission.
(The author was formerly Professor of Economics at IIM Bengaluru)
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