Imagine the village idiot and the archetypal image is that of a slow witted clumsy person. Many governments are thought of in this manner or perhaps parodied thus in newspapers perhaps for readers' entertainment.
Beneath the mundane garb of incompetence lie brilliant strategists in politics as well as the bureaucracy. Underestimate them at your own peril.
The gas pricing policy decision is another example of brilliant strategy.
Consider the following :
DGH, Petronet LNG, and experts such as Mckinsey and Indian Petro peg demand for natural gas at about 311 mmscmd in FY15 at customer gate prices of about USD 10 -11. The planning commission(PC) pegs demand at 405 mmscmd for the same period. Let's go with the expert forum for the sake of being conservative.
This forum predicts domestic production of gas at 185 mmscmd and imports of 126 mmscmd. Cumulative demand from power and fertilizer sector is estimated at approximately 155 mmscmd at customer gate prices of USD 10 - 11. Large demand estimates are optimistic as both sectors are price sensitive and extensively regulated.
Existing gas based installed capacity is 19000 mw. Total generation cost per unit for these power plants will exceed Rs 5.5, making them unviable. Therefore officials hinted that gas input price for fertilizer and power will be notified separately. An obvious reference to subsidy.
Who will bear this subsidy ?
As per the existing framework, subsidy is shared between the oil psu's and the government. At the new price, government's subsidy bill will increase dramatically especially if production volumes increase. However a large portion of this bill will be paid by the psu's. They could become net losers if private sector production increases
Citi expects the share of upstream companies like OIL and ONGC to increase to 50% this year. For these players to benefit from the price hike two events have to occur, 1) Rupee appreciation and 2) Private sector E&P players keeping production constant.
The new policy creates an unique situation where increase in gas production by private sector will lead to larger subsidies and losses for the government and oil psus while creating profits for private sector players. Seems like a zero sum game.
Another justification is that higher production will reduce imports and reduce CAD. But that is an optical illusion as the impact on inflation and currency will remain the same due to the inflated subsidy bill.
Besides E&P is a game of chance, you may or may not find oil. How can the officials be so sure of increased production ?
ONGC's production has remained constant although a few years ago, its gas supply price was raised to US$ 4.2 from US$ 2.8.
Addressing CAD is an immediate problem, will production come on stream immediately ? LNG imports are a very small part of CAD, how much will it help ?
The new gas pricing policy has revised prices to US$ 8.4 w.e.f 1st April 2014. One can only hope this becomes an April fool's joke
Which government will implement it ? the current one or the newly elected government ? Will this policy be upheld if a non Congress government is voted to power ?
Finance ministry insists on export parity pricing for calculating subsidies payable to OMCs but agrees to use import parity price as benchmark for deciding gas price!
Admittedly gas pricing is complex. Although international gas prices have declined sharply due to the abundance of shale gas, major suppliers like Qatar (30% of global gas reserves) are demanding higher prices. A shortage of gas transport infrastructure allows this mismatch. Our policy has fixed price at US$ 8.4 when the Nymex natural gas price is US$ 3.6.
So far the logic of price rise is arcane. So let's change the frame of reference from economic / financial parameters to political parameters. Suddenly this policy looks brilliant.
It is optically equitable but actually only benefits the private sector at the expense of the tax payer and psus. Why should a financially beleaguered government opt for this ?
An upcoming election and private sector bosses' open admiration for the opposition's popular candidate can put things in perspective.
This is brillliant competitive strategy not a gas pricing policy. So who is the village idiot ?
Signing off
Sundeep
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