Indian government unlikely to increase gas prices early in tenure to avoid galvanising opposition unrest

Indian petroleum secretary Saurabh Chandra said on 21 August that the government would clarify its position on raising the price of domestically produced natural gas next week. Prior to this, in one if its first moves, the new Bharatiya Janata Party (BJP) government delayed increasing prices by three months until 1 October. The gas pricing issue is closely linked to India's energy security projects, its economic reforms programmes, and to political and social stability in the country. The dilemma for Indian policymakers is whether to link gas prices to an "assessed" price, determined by the government or private Indian participants, or link it to an international market-based price. India currently limits gas prices using the Administered Pricing Mechanism (APM) for gas produced by state-owned Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL), while prices for production-sharing contracts with private companies are determined according to the terms offered in bidding rounds.

The Rangarajan formula

The current system of capping prices has de-incentivised energy companies from exploring domestic gas, increasing reliance on LNG imports and forcing state-owned companies to explore abroad in order to meet domestic demand. Both expensive undertakings have further strained India's weakened economy, and as a result, there is a growing realisation that prices must be increased to match real production costs. The previous United Progressive Alliance (UPA) government had in December 2013 decided to price all domestic gas from 1 April 2014, according to a formula suggested by a committee headed by Chakravarthi Rangarajan, the former governor of the Reserve Bank of India (RBI) and then head of the Prime Minister's Economic Advisory Council. As per the formula, natural gas prices would be derived from the average price of LNG imports into India and from the prices of natural gas at trading hubs in the United States, United Kingdom, and Japan. The committee proposed that the natural gas prices should be doubled to USD8.4 per million British thermal units (mBtu), from the current USD4.2 per mBtu determined by the Administered Pricing Mechanism.

IHS Energy assess that India's short-term dependence on LNG imports will remain even if the Rangarajan formula is applied. However, in the medium term, the increase will probably stimulate exploration and production activity (India has 47 trillion cubic feet of proved reserves), which would then ease reliance on imported LNG. Such an outcome would yield additional government revenue, reduce the balance-of-payment deficit, and improve security of supply.

Policy reversal?

However, the Rangarajan formula is at risk of being scrapped entirely by the BJP government: in July, a new committee was tasked with establishing another pricing mechanism ahead of the 1 October deadline. This is unsurprising, as in 2013, the BJP had opposed the UPA's move to double gas prices saying that it "would adversely impact the common man as prices of diesel, petrol, fertilisers, edible oil, and power would go up". Thus, positioning itself in favour of a hike in gas prices now would represent a complete policy reversal for the BJP.

The Rangarajan formula, if applied, would indeed eventually lead to an increase in the electricity tariffs and Compressed National Gas (CNG) rates. The BJP government has already demonstrated its resolve in protecting the interests of India's poor by withstanding considerable international pressure in refusing to sign a World Trade Organization Trade Facilitation Agreement earlier this month (see India: 4 August 2014: Indian government's opposition to WTO agreement likely based on domestic political considerations). Since the gas pricing issue is mired in populist politics, raising the price would be perceived as giving in to the demands of the business houses and hence, it remains a politically emotive issue. Political parties such as the Communist Party of India-Marxist (CPI-M) and the Aam Admi Party (AAP) oppose the move accusing the supporters of the hike of ties with the Indian company Reliance, which hold oil and gas exploration rights in the Krishna Godavari (KG-D6) basin off the coast of Andhra Pradesh state. A statement by the CPI-M in June 2013 said, "It is estimated every dollar increase in gas price would increase Reliance's profits by at least USD74 million."

Outlook and implications

Although parties such as the CPI-M and AAP have no significant strength in the Indian parliament, in view of the impending elections in key Indian states, including Maharashtra, the BJP government is unlikely to effect a drastic change in the gas pricing. An abrupt doubling of gas prices, apart from boosting the electoral prospects of the opposition parties, would become a source of large-scale civil unrest in the country. The cascading impact of the rise in gas prices, leading to a rise in fertiliser, electricity, piped cooking gas, and CNG prices would also dent the government's efforts to control inflation, probably leading to opposition-led popular movements against the BJP. The new government in New Delhi is unlikely to risk such a scenario so early in its tenure.

Oil minister Dharmendra Pradhan had provided an indication of the net outcome of the deliberation. In an interview in July he mentioned that the price approved by the UPA government had not taken into account the end user's capacity to pay. Prime Minister Narendra Modi had also said in parliament that the "poor of this country have the first right to its resources". Therefore, while doubling of the gas prices as per the Rangarajan Committee is unlikely to happen. Instead, the BJP government will probably propose an increase of 43–55% to about USD6–6.5 mBtu to make prices affordable for consumers and incentivise exploration.

If gas prices are indeed increased by next month, it would constitute a considerable and long-awaited achievement for the new government so soon in its tenure, even despite the delay. This would further reinforce the BJP's emphasis on streamlining decision-making in contrast to the policy paralysis of the previous government. However, such a decision will also be indicative of the BJP's reluctance to undertake sweeping reforms, and that policies will probably be introduced gradually to avoid mass opposition (see India: 21 August 2014: Indian Planning Commission's replacement likely to have limited impact on investors but labour reforms will improve regulation).