Not just gas

His first year as prime minister safely behind him, Manmohan Singh has made a good start in the second. While there is as yet still no action on the much-needed price hike in petrol and diesel prices, the fact is the petroleum sector consists of a lot more than just these fuels, and this is what Dr Singh has tackled by completely freeing up prices of natural gas for non-power and non-fertiliser units and increasing prices by 12 per cent for power and fertiliser units.

This will fetch ONGC around Rs 2,000 crore more annually. Till this was done, ONGC got around $1.8 per million Btu (British Thermal Units) compared with around $3.8 charged by private producers, who were free to supply their natural gas at market prices.

Ironically, since most buyers still paid the controlled price, ONGC had to shell out about Rs 900 crore a year to the private producers to make good their loss! After the increase, ONGC still loses around Rs 6,000 crore per year by way of subsidised supplies of natural gas to power and fertiliser units.

This is some progress. But Dr Singh’s real test comes now. For, if the Rs 550 crore more that the fertiliser and power sectors now have to pay is not followed up with a reduction in subsidies here, things will be back to square one, the only difference being that ONGC’s shareholders will benefit by the partial relief.

Indeed, the reason why natural gas prices for these sectors have not been fully freed up is the impact on the subsidy bill. In the case of the power sector, if this were to be done, costs would go up by around Re 1 per unit compared with the ten paise or so that the limited hike will result in.

Not fixing the subsidy regime will ensure the sector does not get the kind of investment it requires and that in turn will hurt economic growth. All told, subsidy levels in the energy sector are around $15 billion - if and when the gas pipeline from Iran and Turkmenistan does happen, and the subsidy regime is not fixed, this bill will go up by another $5-6 billion.

The under-recovery on LPG and kerosene is around $4.5 billion and is around $6 billion in the coal sector—Indian coal costs around $35-40 per tonne (after adjusting for the lower thermal efficiency) compared to international prices of around $60 or so.

The subsidised pricing ensures there is no great incentive to be fuel-efficient—power plants in Bihar use nearly one kg of coal per Kwh of power produced compared with 0.64 kg in Gujarat, where coal is more expensive and in the fertiliser sector the best units use half the energy the worst ones do.

It also ensures that producers don’t produce enough—ONGC extracts less than half the gas it can in Tripura today since it incurs huge losses if it does and Coal India does not have the money to invest in new technologies to improve yields.

Fixing this will obviously take time, but Dr Singh has made a good beginning. Whether he follows up, or backtracks as in the case of the interest rates on the employees’ provident fund issue, is an ever-present danger.