Open eyes to market realities
The subsidy regime for power and fertiliser sectors cannot continue for long, especially at a time when related input industries have been decontrolled and deregulated.
By Soma Banerjee, TNN |
NEW DELHI: The ongoing debate over gas pricing in the country has thrown up one crucial question that needs to be answered right away — Can we afford to continue controlling and subsidising power and fertiliser prices? Can India, which is largely energy-deficit, continue to protect its consumers from hard realities?
At a time when most economies are concentrating on efficient energy use and conservation, Indian consumers are being spoilt silly, living in a make-believe world where the true cost is not borne by the consumers.
Artificial pricing across sectors — from power, to petrol and fertilisers — have created a huge disparity between true costs and consumer prices. So, while global prices have been hardening, consumer prices continue to remain low, thanks to cross subsidies or budgetary doles.
The total subsidies in the oil and fertiliser sectors stand at a whopping Rs 39,000 crore and Rs 50,000 crore, respectively. Power subsidies are over Rs 39,000 crore.
The distortion, however, cannot continue for long. It will be difficult to continue with these policies at a time when related input industries have been decontrolled and deregulated. Power and fertiliser consumers in the country need to wake up and face realities.
Power and fertiliser prices have to be market-determined if input prices like gas, which is used as a fuel and feedstock in the power and fertiliser industry, is moving towards market rates. The whole controversy over RIL’s gas prices centres around this distortion.
At a time when most economies are concentrating on efficient energy use and conservation, Indian consumers are being spoilt silly, living in a make-believe world where the true cost is not borne by the consumers.
Artificial pricing across sectors — from power, to petrol and fertilisers — have created a huge disparity between true costs and consumer prices. So, while global prices have been hardening, consumer prices continue to remain low, thanks to cross subsidies or budgetary doles.
The total subsidies in the oil and fertiliser sectors stand at a whopping Rs 39,000 crore and Rs 50,000 crore, respectively. Power subsidies are over Rs 39,000 crore.
The distortion, however, cannot continue for long. It will be difficult to continue with these policies at a time when related input industries have been decontrolled and deregulated. Power and fertiliser consumers in the country need to wake up and face realities.
Power and fertiliser prices have to be market-determined if input prices like gas, which is used as a fuel and feedstock in the power and fertiliser industry, is moving towards market rates. The whole controversy over RIL’s gas prices centres around this distortion.
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The pace of reforms in these related sectors have not been uniform, which in turn has led to the whole question of whether there is a market at all. It is true that unlike the gas producers, who have been given policy assurances of a market regime in the new exploration licensing policy (NELP), power producers in the country have to sell power at highly subsidised rates to domestic consumers.
So, while the gas industry has to derive a market benchmark price by auctioning it at the highest market rates , the power industry manages to get a project by quoting the lowest tariff. The government wears two different hats at the same time.
So, on the one hand, the government’s objective is to get the best price for the gas as it shares a part of the profits earned from the sale of gas. On the other hand, the government acts like a watchdog in the form of the regulator to see that consumers get the best price by keeping power tariffs at the lowest. Result: the highest bidder in the gas sector gets the exploration block and the lowest bidder in the power sector gets to build the project.
This is precisely why different arms of the government speak a different language. While the power and fertiliser ministries continue to argue for lower gas prices to keep power and fertiliser prices low, the petroleum ministry supports market prices as provided under NELP.
Policymakers who drafted the production sharing contracts for oil and gas producers were well aware of these market distortions even in 2001. It is perhaps too late to say that the consumer industries are not prepared for market realities. The idea should be to deregulate and correct the distortions of the consumer industries instead of bringing in price controls in a deregulated sector.
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