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Govt Mulls LPG, Kerosene Price Hike In Small Doses

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After diesel, the government is considering raising cooking gas (LPG) and kerosene rates in small doses of Rs 5 per cylinder and Rs 0.50-1 a litre every month to wipe out Rs 80,000 crore subsidy on the two fuels.

The previous UPA government had in January 2013 decided to raise diesel prices by up to 50 paisa litre every month.

But for aberrations on two occasions, the monthly increases have taken place regularly to trim subsidy on diesel to an just Rs 1.62 a litre. This too looks set to be wiped off to make the fuel deregulated or free, with the new government continuing with the UPA decision.

Following the diesel model, the oil ministry is now proposing monthly increases in LPG and kerosene rates, sources privy to the development said.

Subsidy on LPG currently is a staggering Rs 432.71 per 14.2-kg cylinder and at Rs 5 per month increase it will take 7 years to wipe out the subsidy.

Sources said the ministry is of the view that the monthly increases can be as high as Rs 10 if the political leadership takes a stand.

On kerosene, the subsidy currently is Rs 32.87 per litre and at Re 1 hike per month it would take more than two-and-a- half years to wipe out the subsidy.

Fuel subsidy, they said, is the biggest drain on the exchequer. In the current fiscal, subsidy on diesel, LPG and kerosene is estimated at Rs 115,548 crore. Of this, LPG accounts for Rs 50,324 crore and kerosene Rs 29,488 crore.

This subsidy is met through a combination of direct cash dole from the budget and contribution by state-owned firms like ONGC.

In 2013-14, the government paid Rs 70,772 crore in cash subsidy while upstream firms shelled out Rs 67,021 crore. In the previous year, the government payout was Rs 100,000 crore and upstream contribution Rs 60,000 crore.

For diesel, the subsidy estimated is Rs 35,736 crore but this will come down if the monthly increases continue as planned, sources said.

Petrol price was deregulated in June 2010 and retail rates have more or less moved in tandem with the cost.

With the beginning of monthly increases in January, subsidy on diesel tripped to less than Rs 3 a litre in May last year before a fall in rupee value led to it widening to Rs 14.50 per litre in September, 2013.

Top-level Parleys Going On
Hectic top-level parleys have been going on to hammer out a more palatable increase in natural gas prices that would boost production and not impose a heavy burden on consumers.

Finance Minister Arun Jaitley and Oil Minister Dharmendra Pradhan, were in the Prime Minister's Office over the last two days discussing possible tweaks to the Rangarajan price formula, under which the price of gas would rise to $8.8 from July from $4.2 currently.

Sources said the new government was looking at making some changes in the previous United Progressive Alliance-government approved Rangarajan price formula, which will result in a steep rise in the prices of electricity, urea, CNG and piped cooking gas.

A panel, headed by Bharatiya Janata Party leader Yashwant Sinha, had recommended "factoring domestic cost of production of gas for arriving at the price," the Communist Party of India (Marxist) MP said, adding that it had also suggested fixing the gas price in rupees and not dollars, as is the current practice.

The Rangarajan formula calls for pricing gas at the average cost of importing liquefied natural gas into India and the rates prevailing at international hubs in the US and UK, as well as the price of gas imported into Japan.

CPI(M) leader and MP Tapan Sen has written to Prime Minister Narendra Modi, seeking a review of the pricing formula, saying doubling of rates will lead to a phenomenal burden on the people.

"Natural gas is being produced domestically and must be priced based on cost plus reasonable returns on investment," he said.

"Any other methodology of pricing having no relevance with the cost of production in the name of market-determined or arm's-length basis, tailor-made to benefit the contractor, is bound to have perverse impact on the economy as well as people at large."

The Rangarajan formula would double prices to $8.4 per million British thermal units and result in an additional fertiliser subsidy of Rs 14,500 crore per annum while putting a Rs 29,800 crore burden on the power sector, he said.

Sen, a known opponent of higher gas prices, said the Rangarajan formula, which is being made the basis for revising the rates, should be reviewed as recommended by a parliamentary standing committee.

Iraq Crisis Adds Fuel To Power
While the new government is keen to take an early decision, it doesn't want to add to already high inflation, which may accelerate due to a below-normal monsoon and a spike in oil prices in the aftermath of the Iraq crisis.

Every dollar increase in gas price will lead to a Rs 1,370 per ton rise in urea production cost and a 45 paise per unit increase in electricity tariff. There would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.

If the Rangarajan formula is implemented without changes, power tariff will rise by about Rs 2 per unit and CNG rates will jump by over Rs 12 per kg in Delhi.

Sources said replacing or removing some elements of the formula to bring the revised rate to $7 per million British thermal units, or at best $7.5, are among the options being explored.

Another possibility is to allow higher prices only on output that exceeds current production, or on production from fields discovered under the New Exploration Licensing Policy such as the Reliance Industries-operated KG-D6 fields. This would exclude state-owned firms including ONGC, which produce gas from pre-NELP blocks, from the revision.

Keeping state firms out of the price revision would mean there will be no hike in CNG and piped cooking gas price because their input comes from ONGC fields.

An increase in the rate for RIL, which along with partner BP plc had slapped an arbitration notice against the delay in implementation of the new rate from April 1, when the old rate expired, would make only fertiliser costlier, which the government can subsidise.

No KG-D6 gas is supplied to power or CNG companies and the new rate would make its deepsea finds viable.

Sources said a final call on the rate to be implemented may be taken by the Cabinet.

The Rangarajan formula calls for pricing rates at an average cost of importing liquefied natural gas (LNG) into India and rates prevailing at international hubs in the US and UK as well as the price of gas imported into Japan.

Sources said there is a thought that high-priced Japanese imports, which have no relevance to India, should be excluded from the formula to limit the gas price increase to about $7-7.5.

The previous UPA government had in December last year approved the new formula for pricing all domestic gas from April 1 but the general elections were declared before the new rate could be announced.

The oil ministry had on April 21 told Reliance Industries, which had been supplying gas from its eastern offshore KG-D6 field at the old price of $4.2 even after it expired on March 31, that the new rate will be implemented from July 1.

Sources said the government does not want to miss this deadline.

Will Win Public Trust: Mukesh Ambani
Facing criticism from certain political quarters over natural gas price hike, Reliance Industries Chairman Mukesh Ambani today expressed confidence the company will win public trust as it believes in creating wealth and livelihood for millions in a transparent manner.

"We are here to win trust and we will win this with truth and transparency," Ambani told the shareholders at the 40th AGM here in response to an indirect question on Aam Aadmi Party's (AAP's) allegations against the company.

He went on to add that "I want to assure you that we are a mature corporation and we are committed to creating value...I am a big believer that we should work with people who have different views than us, convince them that what we are doing is right".

AAP leaders, including its national convener Arvind Kejriwal, alleged that the proposed gas price hike would lead to further inflation and only benefit RIL.