Economic survey: Gas prices must be linked to market
Market-determined pricing for gas in India is the best policy going forward in order to ensure greater investment, competitiveness and transparency in the sector, according to the Economic Survey.
The survey also recommends capping the LPG subsidy to 10 cylinders per household per year from the current 12.
“Market-determined arm’s length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competitiveness and transparency remains the first-best solution that merits consideration. It would reflect the appropriate gas price in relation to alternative fuels,” according to the survey.
The current gas pricing formula, in place since October 2014, mandates that the price of natural gas be revised every six months on the basis of a weighted average of rates in gas-surplus economies such as the US, Mexico, Canada, and Russia.
“Some of the indices that the government had used in the current gas pricing formula are connected to competitive markets, and consequently result in prices reflected in relatively supply unconstrained market,” Deepak Mahurkar, Leader, Oil and Gas Industry for PwC told The Hindu.
In other words, basing the price of gas in India on the prices prevalent in gas-rich countries has resulted in prices in India being too low, thereby discouraging investment in the sector.
“Market-linking gas prices ostensibly means that the prices are determined by local demand and supply conditions. That will give the investors a reasonable opportunity to evaluate investment merit,” MrMahurkar added.
“It may be useful to cap the subsidy to 10 LPG cylinders for each household (that being the maximum used for usual domestic cooking) while aligning taxes and duties on domestic and commercial LPG users,” according to the survey. Petroleum products and natural gas should be included in the Goods and Services Tax (GST), or at least their exclusion should not be introduced in the Constitution Amendment Bill.
At the moment, LNG imported to be used in the power industry is exempt from customs duty while it attracts a five per cent duty when imported for any other use. The survey recommends that there should be no exemption for any sector.
“In order to develop a cost-effective and revenue-neutral mechanism for swapping of gas across producing and consuming states for the national gas grid, it is important to make special tax provision for sale of natural gas under the Central Sales Tax Act 1956. Natural gas and LNG may be treated as declared goods to bring about tax parity with crude oil and make prices uniform across states.”
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