A retrospective gas price hike is on the cards

May 2, 2014

In this issue:
» Berkshire Hathaway buys AltaLink
» Gold or real estate this Akshaya Tritiya?
» A mixed performance by Auto companies in April...
» Is the new US policy on IP rights hypocritical?
» ...and more!

The general elections are on in full swing and as we are aware, the government is bound by the Election Commission's model code of conduct. This means that the government can't force through big policy decisions during the elections, without taking the EC's permission. This is to ensure that public is not influenced to vote for the ruling party because of such policy decisions. While the model code of conduct is certainly important, it has really rubbed the government the wrong way when it comes to gas prices.

The oil ministry was all set to double the price of gas sold across the country on 1st April 2014. This decision could have taken the administered price of gas from US$ 4.2 per unit to US$ 8.4 per unit. The EC had quite rightly vetoed the move. But has that stopped the government? It doesn't look like it has. If news reports are to be believed, there are chances that the price hike would be with retrospective effect from 1st April 2014.

The ministry has naturally denied that this move would favor certain vested interests. The logic being thrown around is that these vested interests produce barely 15% of India's natural gas. This is rather dubious reasoning we believe. The question here is not about the amount of gas that any company produces. Rather it is about corporates earning favors from the government at the expense of the public at large. It is common knowledge that natural gas is a key input commodity for sectors like fertilizer and power. If the price of gas were to double then it is inevitable that other sectors of the economy would feel the burden. What is worrying is that the government has not offered to properly compensate the sectors that will be affected. It is this callous attitude of the government that has led to sharp criticism from many quarters.

It is deeply disturbing that the government has adopted an attitude which suggests favoritism towards a corporate. Also, the move is quite unplanned with regards to handling the impact on priority sectors. A nation's natural resources belong to its people. All decisions regarding its use, including that of pricing should be done keeping in mind the national interest. Is the government listening?

Do you think that a gas price hike with retrospective effect smacks of favoritism? Let us know in the Equitymaster Club or share your comments below.

Editors Note: There's more to getting wealthy than investing in stocks... to learn American wealth coach & DR contributor Mark Ford's wealth building strategies check out his 11 Secrets to Building Wealth (free access).

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 Chart of the day
The US Federal Reserve may like to believe that the loose monetary policies have helped to revive the economy. But statistics have consistently proven that the central bank's claims are far from truth. In fact the last US GDP growth data as per CNN nails the coffin. It shows that the US economy's growth rate was as low as 0.1% in first quarter of 2014. The growth rate is lower even by post-recession standards. Since 2009, the US economy has been growing at a rate of about 2% to 3% per year. However all this while the problem of joblessness has stayed. And there were enough signs that the liquidity driven growth is not here to stay. Therefore it is hardly surprising that with the first signs of QE taper, the US economy has come to a grinding halt. While economists are blaming the harsh weather in the US for the slowdown, the fact is that the US is far from a sustainable recovery.

US GDP growth slows to a stand still

If you are keen to understand why size can be a big hindrance in the asset management business, you would do well to ask Warren Buffett. The Oracle of Omaha has been harping on this handicap with his investment vehicle Berkshire Hathaway for quite some time now. He reckons that the larger the cash pile gets the more difficult it becomes to find investments that could really move the needle on performance. As a consequence, one is forced to move down the moat hierarchy and invest in businesses like utilities. While they don't provide returns as good as say a consumer staple or a soft drink major, they are nevertheless better than bonds and liquid cash. And this trend has become more and more evident at Berkshire Hathaway of late. What else would explain Berkshire's latest acquisition in the form of a power transmission line company operating out of Canada? As per reports, Berkshire Hathaway's energy unit agreed to buy AltaLink, the owner of the largest transmission grid in the Canadian province of Alberta. The deal has been pegged at close to US$ 3 bn. Although Buffett wasn't directly involved in the deal, we won't be surprised if he himself does something similar in this space in times to come. Small investors however would do well to steer clear from copying the investment legend. For they are not constrained by size as Buffett is. For them, companies with strong competitive advantage still remain the best bet we believe.

It is said that investors should be more rational rather than emotional. However, Indian investors have always defied this saying when it comes to investing in gold. 'Akshaya Tritiya' is one such occasion where investors indulge in heavy gold buying with the belief that it will grow manifold in few years. However, as per a feature in financial express, the scenario may be different this year with investors' interest more skewed towards property. As compared to gold, returns on properties are more aligned with economic scenario. Therefore, positive economic outlook on account of narrowing current deficit, strengthening rupee as well as prospects of a stable government have increased investor confidence in properties. On the other hand, gold has failed to live up to expectations. Of late, various curbs on import of gold by the government have adversely impacted its attractiveness amongst investors.

Both gold and property investment have their pros and cons. Gold is considered a safe haven and hedge against inflation during difficult times. Gold is also more liquid than property. At the same time, investing in real estate is easy as one can raise funds through loans while gold needs to be bought with own funds. One can also let out a property and earn a stable income on the same. Unfortunately, gold rarely gives you an opportunity to earn an extra income. Thus, investing in gold or real estate should purely be on the basis of one's investment objectives and risk taking capabilities. The best is to have a well diversified portfolio with different asset classes that can shield an investor from volatility in any particular asset class.

With the month of April 2014 coming to an end, data relating to the automobile sales volumes has been released. When it comes to sales of passenger vehicles, the situation remains subdued. While the overall situation continues to remain grim, certain car makers have managed to buck the trend; largely due to the new launches doing well. The country's largest car manufacturer Maruti Suzuki reported a 12.6% decline in volumes during the month. Volumes of its mini-car segment - the bread and butter segment of the company - declined by a fourth. On the other hand, Hyundai, Honda and Ford did relatively well.

How long such a trend will continue is anyone's guess. Whether the demand is affected by the poor macro economic conditions, negative sentiments, the many uncertainties, high interest rates, or a combination of all, it definitely gets difficult to gauge. Nevertheless, it seems that the auto manufacturers are hopeful of the new government bringing about some changes to revive the car market in India. In our view, investors would do well not to ignore the aspect of pent up demand across the various segments of the auto industry.

There is quite some controversy brewing in intellectual property space. India has been alleged by US for pursuing trade policies that are undermining US intellectual property. In a 'Special 301' report, India has been singled out by US and has been kept under priority watch.

However, it seems that the whole issue has been blown up to suit the interests of the US business and has less to do with ethics and code governing IP rights. The major area of contention has been patents. In some of the instances, India has limited the rights of foreign patent holders. This was done to make sure that interests of consumer do not get undermined as big corporates make profits through the use of patents. For example, in Pharma sector, there have been some instances when the foreign patent holders were selling crucial drugs at unaffordable prices. In other cases, they were trying to get patent for crucial drugs that would have made the price of the drug beyond the reach of masses. However, using compulsory license or denying patents, the interests of consumers were upheld over foreign pharma firms. This seems not to have gone down well with US. Now this is ironical we believe. After all, there have been cases when US itself has issued compulsory licenses to protect interests of its own masses. The stand US is taking reeks of hypocrisy. It's time that global agencies come out with clear policies so that overall consumer interests are given priority over pecuniary interests of a single player.

The Indian stock markets continued to trade higher. At the time of writing, the benchmark BSE-Sensex was up by 50 points. IT and pharma were leading among gainers. Majority of the Asian stock markets were trading in the red with Singapore and Japan being the major losers. Indices in Taiwan and Hong Kong were trading positive. European markets opened the day on a positive note.

 Today's investing mantra
"The key to making money in stocks is not to get scared out of them." - Peter Lynch

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15 Responses to "A retrospective gas price hike is on the cards"

swapan lodh

May 3, 2014

question of date of implication comes later. my prime question that is, is it really acceptable? in the agreement on drilling it is an important item is even after careful studies of the explorer if gas is not sufficiently available then onus shall be on the explorer as it is them who conduct the search.hence failure of any kind is to be because of their fault. recent case is the departure of exxon (?) from a site in chitagong in bangladesh. ib case kg basin the exploration was highly appreciable since the beginning.but suddenly only since early 2013 the production started getting reduced without conceivable reason.so according to normal practice the explorer should have accepted their inability and quit letting some other in.


C K Vaidya

May 3, 2014

That Natural resources belong to the country is not in doubt. However, does it mean that they should be handed over to one sector of the economy at a subsidised price? It is surprising that you advocate doing away with fertiliser subsidies on one hand and argue in favour of continued low price for major input to fertiliser industry.
International price of gas is substantially higher than the $4.2 that was fixed several years back and the Union Cabinet had rightly decided several monthes back to raise the same from April 1. In fact, EC is wrong in coming in the way of implementation of this decision.


O B Dias

May 3, 2014

No. We are operating in a Capitalistic world, and artificial depression of any price is bad. You are like an ostrich, putting your "head in the sand". Remember what sticks up when you lower your head into the sand! You seem to have forgotten the disastrous consequences of the Nehruvian Socialistic govt.


deepak mitra

May 3, 2014

planning comission formulated a detailed procedure of arriving at the fair price of gas in india. rangarajan committee was entrusted the task of arriving at the price of gas keeping in mind the observation of planning commission. the enhanced rate of gas was worked out by rangaraj committee. the whole affair was refered to cabinet committee for approval. the approval came after which the escalation formula was incorporated in the new contracts of gas exploration. new govt. has right to review and modify any decision but a wrong signal will go to the foreign contractors of exploration. inrease in price is needed for more production and reaching self sufficiency in oil and gas.



May 3, 2014

These Sky High Gas Prices Is Nothing Bud Pure Old GREED


virendra bapna

May 2, 2014



abhay dixit

May 2, 2014

It would have helped if you had given some data regarding international prices, comparable prices in free markets or gas prices charged by Russia to Europe. Without that we cannot make informed decision.



May 2, 2014

What to say of revising the price? The agreement needs to be placed in the Public domain. The clause of permissible increase needs to be high lighted. If there is no such clause the increase becomes illegal. This massage needs to go to Public and the concerned Ministry loud and clear.



May 2, 2014

In continuation of previous comment, the present price of Natural Gas, $4.2 per unit, does not allow any scope for further Investments in Exploration & Development of our Natural Gas resources. Inhouse Natural Gas supplies today are a fraction of the Estimated Nation's Resource. At present prices, this resource of the people will remain locked up while the people's hard-earned Income will be squandered in Importing Gas at over 4 times this price. This waste of precious Public Money defies CommonSense & is clearly an Anti-people policy. Strangely, the article seeks to promote this very Anti-people policy while sabotaging the UPA Govt's efforts to Increase Self Reliance, Enhance benefits to the people by Use of our Natural Resource



May 2, 2014

For favouring their money masters the politicians with buraucrates in tow can anything in this country.This country is lucky to have people like Rai Ex CAG and SC Judges who are holding the beacon of light for common man. The time may not be far off when only people who survive in their jobs are those who are ready to tow the line of least resitance.

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