The Kirit Parikh committee, on gas pricing, recommended that India should have free market-determined prices for natural gas and remove all caps by January 1, 2027. The committee, formed by the Government of India with Dr Kirit Parikh as its chairman in September 2022, had submitted its report on gas prices review on November 30, 2022. The committee was mainly intended to provide a fair price to consumers and also to suggest a price strategy to increase domestic production.
Currently, the price of natural gas produced domestically is determined based on the average prices of four key global markets – Henry Hub of the US, Russian gas, NBP (National Balancing Point) from the UK, and Alberta gas from Canada. On this basis, the price of natural gas in India is calculated in every six months, i.e., from April 1 to September 30 and from October 1 to March 31. Generally, India follows a price floor and a price ceiling for this purpose. According to the Union Minister of Petroleum and Natural Gas, India consumes 5 million barrels per day which is growing at a much higher rate than the global levels. The committee also recommended to meet the increasing demand and to encourage investments to do so. As per the report, the main aim of the pricing policy should be to implement a market-determined price for all the gas produced in India. It says that the development of localised prices is important for the development of the gas market.
Why the Need for Reforms
The current price methodology does not include the amount of gas imported by the country and the amount of gas produced domestically. The methodology does not produce an optimum price as the gas produced domestically is generally cheaper than the oil, imported. If that contribution is not addressed, the output may not fully represent the current situation.
Methodology The price of the current quarter is calculated on the basis of the price of the previous year and is applied after a quarter. So, the price of the current 3 months is as per the price older than the present situation, globally. This rigid change in price does not address the current concerns. The price in India may either be too low or too high in crisis situations. For example, if the price of petrol is soaring in global market, say Rs 150 per litre (in 2001), people in India will comparatively have an advantage, because the price of gas in India is fixed at Rs 100 based on the previous year (2000) and implemented after 3 months. However, the oil producing companies like ONGC (Oil and Natural Gas Corporation), Reliance, and Oil India will not have the incentive to produce at such low prices. On the contrary, if the price of gas globally the following year (2002) is Rs 90 due to heavy production that year, the price in India may be much higher than Rs 90 due to the high prices the previous year (2001). Therefore, this pricing that is being currently followed is always at a lag and may not exactly represent the current market situation in the world.
It is due to this difference in the price range globally and domestically that oil-producing companies may not have the incentive to produce oil with high costs involved when the price of gas is low in India. As a result, domestic production will decrease whilst imports will increase. Since global prices are already high, the price of imports will also rise and negatively affect both the consumers and the domestic producers. However, when the global prices are low globally and high in India, the oil imported is generally higher than the oil produced, and the country has to pay relatively more for imports. Though the gas may be produced locally due to high prices, the consumers will not benefit from the low gas prices globally. Anyway, the consumers have to bear the brunt of higher prices compared to the market prices.
That’s why there is price flooring and price ceiling to the gas prices in India. When the price is not market-determined and there is State intervention to decrease the high prices. In that situation, it is the State that has to bear the brunt of excess price rise which could heavily affect the government exchequer.
Key Recommendations
Some of the key recommendations of the committee are as follows:
- International and domestic prices should be linked. State producers will have a minimum price floor of US$ 4 per metric million British thermal unit (MMBtu) and a price ceiling of US$ 6.5 MMBtu, which may be increased annually by about US$ 0.5 per MMBtu till 2027.
- The price and pricing formula of fields in difficult geological conditions is to be kept the same as the fields in deep sea or in high-temperature or high-pressure zones. But they suggested a price ceiling of US$ 12.46.
- Natural gas be brought under the GST (goods and services tax). Any revenue lost due to it can be compensated similarly as in the case of the removal of VAT. It was also in the favour of excise duty moderation.
- The government should take measures to improve the gas in the energy mix to 15 per cent by 2030.
Impact of the Recommendations
These recommendations will have the following impact on the Indian economy:
- The recommendations are from a balanced perspective of producers and consumers.
- The change in the natural gas prices methodology would lower the gas prices and help in stimulating the demand and increasing the consumption of natural gas.
- The market-determined prices will also reduce the burden on the government’s exchequer.
- Bringing the natural gas under the GST regime may probably reduce the incidence of different central and state taxes.
- There is a possibility of huge fluctuations when we consider market-determined prices. The burden on the government and the producers may reduce, which is a benefit to the balance sheet, but this could have a trade-off.
- If the producers benefit due to high prices, the consumers will have to suffer leading to unrest in the public against the government. If the consumers benefit due to low prices, the companies and thereby government will have to suffer.
- The committee has submitted the recommendations. The government has to weigh the costs and benefits and accept those recommendations which would result in a win-win situation for all the parties involved.
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