Unshackle, step away!

Updated: May 18 2006, 05:30am hrs
Governments decision to step in for pre-negotiating natural gas prices for the fertiliser industry makes no sense. Differential pricing based on end-use contradicts economic logic and the industry needs decontrol, not hand-holding that breeds and encourages inefficient decision-making.

The finance ministrys logic is to make available gas at reasonable prices, since it expects the fertiliser subsidy bill to decline as natural gas progressively replaces naphtha, furnace oil and LSHS as feedstock. This admittedly desirable end-result, surely, does not need government to step into price negotiations for user-industries. The real answer, albeit a politically tough one, is to decontrol fertiliser prices and let industry make its decisions for the most efficient feedstockdomestic natural gas (DNG), re-gassified LNG or locating fertiliser production in countries where it can get the best gas price, as a sound business decision. Essentially, supply of gas can be ensured if the pricing is attractivewhether to impart confidence to players to invest in commercialisation of new discovered reserves or to strike viable deals for imports. Moreover, by bringing in PSUs to negotiate prices, DNG pricing may well cast its shadow on the benchmarking process. But, the ad hoc DNG pricing regime does not send the right signals, both in choice of feedstock for user industries and for gas producers to optimise and enhance supply. It does not reflect opportunity cost and discriminates between producers. Artificially low DNG pricing has led to pent-up demand in the fertiliser sector, and gas-based units end by using costlier naphtha to run plants at optimum load.

Such distortions would end only if market forces are allowed to determine gas prices. The crux is that government fears a surge in its fertiliser subsidy bill if it eases gas price distortions. But the answer is to do away with the cost-plus group concession scheme for urea, that calls for any escalation in cost of inputs (including gas) to be reimbursed to producers as subsidy. The removal of fertiliser price controls and giving targeted subsidy support to small farmers is key; if the government does not fix the selling price, it will not be obligated to compensate producers.