The Narendra Modi government is about to make two momentous decisions in the energy sector shortly – the first on the ‘right’ price for domestically produced gas, and the other on the pooled price of locally produced and imported gas (R-LNG) for the power sector.
Whatever be the economic logic that will underpin the decision it eventually takes, it is clear that the government does not want to be seen to be supporting any one’s case to the detriment of somebody else’s interest.
The government will raise the price of domestically-produced gas which will benefit producers like RIL, ONGC, Oil India, GSPC and others. Almost simultaneously or perhaps slightly before that announcement, it will decide on pooling of natural gas prices for the power sector. The decision should benefit both the Ambani brothers, Mukesh and Anil, and inevitably others in the two industry sectors.
Three years ago, the UPA government set up a committee headed by the Planning Commission member Saumitra Chaudhuri to examine the need and suggest a viable scheme to fix a pooled price for natural gas delivered to consumers. That move was mainly designed to conceal a massive bungling operation – some term it as an exercise designed to mask a colossal corruption by Petronet LNG Ltd (PLL) – in the import of LNG from the Gorgon project in Australia.
It forced the state-owned GAIL to sign a Sales Purchase Agreement (SPA) with PLL but, with no takers for its costly R-LNG, GAIL began lobbying for the need to pool prices of costly LNG with cheap domestic gas. The international LNG lobby had tremendous influence over a section of the Planning Commission which did everything possible to push the case for pooling of natural gas prices.
The Committee did not recommend general pooling of prices but favoured a sectoral approach. General or sectoral, the pooling proposal was opposed tooth and nail by Mukesh Ambani-controlled RIL and the UPA government was too weak to resist it. RIL’s argument was that pooling of prices was meant to subsidise LNG producers – and to be fair there is considerable merit in this argument
In India, one has often seen that the resistance to a proposal isn’t always built on logic – and a contra stand is taken to puncture someone else’s interests. Could this be the reason why Anil Ambani opposed the move to raise the price of natural gas from domestic sources – an issue that RIL’s Mukesh Ambani was pitching for?
There was no visible sign of resistance from the Anil camp after the two brothers settled for a peaceful co-existence and even started to discuss the scope for marginal collaboration between their businesses. But the lobbies often work in the shadows and no one can beat the Ambani brothers in a cloak-and-dagger operation.
It is possible that in its move to persuade the government to implement the Rangarajan gas pricing formula, the Mukesh camp may have struck a deal with Anil’s. As a quid pro quo, Mukesh may have relented in his opposition to the suggestion for price pooling of natural gas. The deepening silence, inaccessibility and the physical invisibility of some of their lieutenants give sufficient indications of a deal.
Pooling of natural gas prices does not make economic sense. The power that used to be produced from plants that once used cheaply priced gas will go up. At the same time, power produced from plants using imported LNG will come down. It is a zero sum game and there is no real benefit for the country, and will only re-order the clashing interests of private players.
The Modi government is preparing to implement a deliberate strategy to ramp up power generation in the country, without which its plans to revive the stuttering economy will not take off. The gas-based power plants must work at full capacity and this is possible only if they can sell the power.
Narendra Modi’s power minister, Piyush Goyal, is a dynamic politician in whom the Prime Minister has immense faith. Unlike many other politicians, he is educated and understands economics — and this is one of the reasons why lobbies have not been very effective in influencing decision making by the Modi government, unlike the UPA. Pooling of gas prices may be bad economics but that wrong is preferable in the interest of the government’s goal to maximise power generation at any cost.
Mukesh Ambani and other gas producers will have no ground to complain as the price of domestic gas is also being raised. One positive element in Modi’s style of governance is that it is not favourably disposed to the system of appointing committees to decide on sensitive issues. The UPA government virtually abused the mechanism to defer decisions and favour interested parties. There are any number of Convenient Experts (CEs) in the country who are inducted into such committees. They need not necessarily know the subject and the only “meritorious” attribute they possess is that they are extremely pliant. Their names are identified by the interested parties and the government used to readily agree to their appointments. Take for instance, the hydrocarbon sector. An earlier committee had prepared a Hydrocarbon Vision 2025. Someone in the industry wanted another one. Moily readily agreed. This time the horizon has been extended till 2030 and the mandate has been slightly modified. These CEs are well-off characters, drawing huge pensions but agree to this deliberate mischief because they want to stay in the limelight.
Dr C. Rangarajan has badly let down the community of CEs and domestic gas producers when he failed to defend his pricing formula for domestic natural gas. He had a respectable image that was badly mauled after he failed to take on his critics. The charges against him, if unsubstantiated, could be defamatory in nature and so his well -wishers expected him to proceed against his detractors. But Rangarajan was wiser: he knew the limits to expertise, especially in an area like natural gas he was not at all familiar with. It created a piquant situation where the stude
nt started teaching the professor (redolent of William Wordsworth’s apt line: “the child is the father of man”. Prof. Rangarajan, a known monetary expert, must have been deeply distressed by the turn of events but this should be seen as a lesson for other CEs. The halo starts to slip quickly when the acolyte discovers the revered teacher also has feet of clay.
In the UPA government, no one tried to understand Rangarajan’s formula or question the recommendations because they were made for a specific purpose. Unfortunately, for Rangarajan someone in the Modi government understood the formula long before he became a minister and had recorded his objections.
The panel of four bureaucrats, which was asked to work out the pricing formula for natural gas, has completed its job in a short period of two weeks. A decision is expected soon after the elections to the states Assemblies of Maharashtra and Haryana. The revised price of gas cannot be the one that Rangarajan recommended for obvious reasons. Nonetheless, the gas price hike will be significant — far better than what would have been thrown up using arm’s length criteria.
Both the Ambani brothers will be happy and so will the other beneficiaries. We are not suggesting that Modi government is immune to the pressure from industry lobbies. But till now, it has created an impression that it isn’t going to allow any one in industry to look upon an administrative ministry with a proprietorial (apni hi dookan) air – a critical failing that the UPA regime seemed to not only tolerate but also encourage.
