Prime Minister Narendra Modi on Saturday took bold steps to free the economy from the clutches of fuel subsidy by deregulating diesel and formalising the price formula for natural gas. This also insulates his government from politically-sensitive decisions in future.
After a Cabinet meeting, Finance Minister Arun Jaitley announced that diesel price stood deregulated to allow it to move as per market conditions, just like petrol. There will be an immediate respite of about Rs 3.50 per litre on pump price given the considerable reduction in international crude oil prices.
Announcing its first price cut since January 2009, Jaitley said: ?The Cabinet has decided to completely deregulate the price of diesel. Henceforth, the price will be linked to the market. Over the last five years, prices of diesel has significantly gone up. But given the crude price today, diesel prices would stand to be reduced after being market-linked.?
The move also eases the government?s huge subsidy burden paid out of the budget. In the first quarter of this fiscal (April-June 2014), the under-recovery burden on oil marketing companies was Rs 9,037 crore which would have required a sharing mechanism between the budget, consumers, OMCs and upstream oil and gas companies.
Petrol and diesel prices were deregulated in April 2002 when the NDA government led by Atal Bihari Vajpayee was in power. But administered pricing regime made a back-door entry in 2004 with UPA Petroleum Minister Mani Shankar Aiyar pushing for control on diesel, LPG and kerosene prices.
Saturday?s move was premeditated since a meeting of the Cabinet Committee on Political Affairs, which usually decides petroleum pricing matters, was scheduled for Monday. Petroleum Minister Dharmendra Pradhan also announced in Orissa that the price reduction would take place on Sunday.
The CCEA also tweaked the UPA-approved gas pricing formula to raise gas prices by about a third to $5.61 per million British thermal units rather than double ? what the UPA approved formula would have resulted in.
The increase would make production from stranded and deeper gas pockets more viable and boost domestic supply, thereby attracting investment but without hurting its consumers like power and fertiliser and the common man which uses piped gas for cooking or for filling up their automobiles.
At present, bulk of local gas is currently sold at a base price of $4.2 per mBtu and the marginal increase would bring down the subsidy outflow on urea and power.
This gas pricing was also slated for after November 15, as per a Cabinet decision last month but the government pushed for immediate submission of the CCEA note late Friday and introduced it without listing it on Saturday?s agenda.
Coming days after labour reforms were unveiled to attract investors, the twin moves are seen as the NDA government?s resolve to fix India?s economy. However, it also sent a tough signal by refusing to hand the new price to Reliance Industries Ltd until the issue of supply shortfall was resolved.
?The matter relating to cost recovery on account of shortfall in envisaged production from D1, D3 discoveries of Block KG-DWN-98-3 is under arbitration. Hence the operator (RIL) would be paid the earlier price of $4.2 per million British thermal units till the shortfall quantity of gas is made good,? the CCEA note stated.
The difference between the new prices and $4.2 per mBtu would be credited to the Gas Pool Account and whether the collection would be paid to RIL or not would depend on the outcome of the arbitration.
But the higher price would be available to national oil companies including for the gas produced from fields handed to them years ago under nomination.
The approvals follow from the recommendation of a Committee of Secretaries which suggested a new formula by modifying the Rangarajan formula.
It removes both Japanese and Indian LNG import components, replace Henry Hub Price with Alberta Gas Reference price, using Russian actual price instead of National Balancing Point price considered under former Soviet Union countries and remove transportation and treatment charges for different hub prices.
The new formula, approved by the CCEA, translates into a new price, effective from November 1 until March 2015, of $5.61 per mBtu but the next revision would be valid for six months. The first price has been determined on the basis of price prevailing between 1st July 2013 and 30th June 2014.
?Revised gas price would be applicable to all gas produced from nomination fields given to Oil & Natural gas Corp and Oil India, New Exploration Licensing Policy blocks, Pre-NELP blocks where production sharing contract provides for government approval of prices and coal-bed methane blocks,? the approval stated.
However, there are exceptions to which this new pricing would not apply:
* Small and isolated fields in nomination blocks, given their peculiar conditions, guidelines for pricing of gas were issued in 2013 would continue to apply.
* Where prices have been fixed contractually for a certain period of time, till the end of such period.
* Where the PSC provides a specific formula for natural gas price indexation/fixation.
* Such pre-NELP blocks where government approval has not been provided under the PSC.