Category: Pricing Policies & Subsidies

Food, fertilizers and fuel – need ‘overhaul’, not just re-routing of subsidy

In its maiden budget presented on July 10, 2014, NDA-government has announced setting up of an expenditure reforms commission (ERC) that will examine all subsidies viz., food, fuel, fertilizers and come up with a road map for restructuring them. Further castigating existing dispensation as one that does not target beneficiaries (read poor) and leads to ever rising ‘un-quantifiable’ subsidies, it has promised to switch over to a scheme of direct cash transfer (DCT) to poor in a focused and transparent manner. Since then, it is close to a month and ERC has not been constituted as yet. At this pace, we can’t expect its recommendations before end of current year. Therefore, any major restructuring may have to wait at least...
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Prune subsidies vide censoring producers

Contrary to expectation, there was no big bang reform in regard to subsidies in Modi-government’s maiden budget presented on July 10, 2014. However, Arun Jaitley announced setting up of an expenditure reforms commission (ERC). While, we may have to wait for ERC recommendations until next budget in February, 2015, meanwhile Jaitley has given some ideas on direction in which government intends to move forward. Thus, he opines that extant dispensation of subsidies which he describes as ‘un-quantifiable’ and beneficiaries ‘un-identifiable’ cannot be allowed to continue. He emphasized need for replacing this by a system of direct subsidy transfer to poor. To countenance menace of subsidies, Jaitely alluded to fundamental need for consumers/users to pay for increase in cost of goods...
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RIL/BP/Niko exploit ‘fault line’ in Rangarajan formula – for a bonanza

On January 10, 2014, Government had notified new guidelines for pricing of domestic gas applicable from April 1, 2014 that would lead to doubling from current US$ 4.2 per mBtu. Even as EC has deferred its implementation for now, meanwhile, fertilizer industry has got another shocker. In the gas sales purchase agreement (GSPA) for supplies from D-6 block of Krishna-Godavari (KG-D6) basin, Reliance Industries (RIL) has proposed that government fixed rate will be charged on gross calorific value (GCV) basis instead of current practice of charging on net calorific value (NCV). It also moots marketing margin of US$ 0.135 per mBtu on GCV basis. For arriving at price applicable to all domestic gas, Rangarajan formula takes average of hub prices...
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Gas pricing – plunder camouflaged as incentive

The anti-corruption branch (ACB) of Delhi Government – On Kejriwal’s behest – has filed FIR against Veerappa Moily et al for criminal conspiracy to double gas price to US$ 8.4 per mBtu (million British thermal unit) from April, 2014. He opines this will give a windfall of Rs 54,000 crores annually to RIL which produces gas ‘allegedly’ at cost of US$ 1 per mBtu. However, Moily justifies saying ‘system of pricing is based on expert advice’. So, what system has government adopted? RIL discovered gas in D 1&3 fields in KG basin in 2002. It was awarded these fields under NELP-I in 1999. Under production sharing contract (PSC), price was to be market determined keeping in mind ‘arms-length’ principle and...
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Gas pricing rewards the defaulter

The Government has given Reliance a pretty long rope, despite its inability to meet its production sharing contract (PSC). This has led to fertiliser and power companies being badly hit for no fault of theirs. Will these companies be compensated for losses? First, for some background on how the PSC came unstuck. In June, 2013, Cabinet had decided to double price of domestic gas from $ 4.2 per mBtu to $ 8.4 per mBtu from April 2014, based on recommendations of a Committee under C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC). However, a notification was held back in view of a dispute with RIL-BP-Nikko, operating the D 1, 3 fields in KG basin. The bone of contention was...
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Pruning LPG subsidy – one step forward, two steps back

UPA (United Progressive Alliance) Government always talks loud on economic reforms. However, it moves at a niggardly pace when, it comes to taking hard policy decisions. Moreover, there is no guarantee that it would stick to those decisions. A classic example is LPG subsidy. For decades, sale of LPG (besides diesel and kerosene) was subsidized under an administered pricing regime (APR) for petroleum products. Funds for subsidy came by way of revenue generated from sale of products like naphtha, ATF (aviation turbine fuel), fuel oil, LSHS (low sulphur heavy stock) etc at higher price. Essentially, this involved cross-subsidization by consumers of high end products like naphtha and ATF through what was euphemistically described as Oil Pool Account (OPA). OPA was...
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Hike in price of domestic gas – defaulter rewarded

In June, 2013, Cabinet had decided to double price of domestic gas from US$ 4.2 per mBtu to US$ 8.4 per mBtu from April, 2014 based on recommendations of a Committee under Dr C Rangarajan, Chairman, PM’s Economic Advisory Council (EAC). However, a notification in this regard was held back in view of a dispute with RIL-BP-Nikko operator of the D 1, 3 fields in KG basin off the AP coast. The bone of contention was a huge shortfall in supply of gas versus the committed quantity under the PSC (production sharing contract). While, Ministry of Petroleum & Natural Gas (MPNG) argued that this was due to a deliberate act on part of RIL not to drill required number of...
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