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Rollbacks: Nothing new

Nov 25, 2004

Indian homes would have a lot to cheer about yesterday's developments with the government rolling back its decision to hike LPG (liquefied petroleum gas) prices by Rs 5 per month until its share of subsidies is eliminated. Also the fact that natural gas prices, which for long are pending a hike, have been put on hold would bring a sigh of relief for consuming sectors. Natural gas
Natural gas prices for the power and fertilizer sectors, which consume nearly 70% of the country's gas availability, were to be hiked by 12% for fertilizer and 26% for power consumers. To put things in perspective, the ministry had proposed a hike to Rs 3,200 per TSCM (thousand standard cubic meters) for the fertilizer units and Rs 3,600 per TSCM for power from the current cap of Rs 2,850 per TSCM. This comes on the back of rising subsidy pressure on ONGC due to the higher differential paid by the company on gas sold by joint venture partners at regulated rates. Currently, domestic natural gas prices are one-third of the benchmark prices in the international markets.

LPG
What is positive about the meeting is that the government has not bowed down entirely to the political pressure and has not rolled back the Rs 20 per cylinder hike that was announced in the first week of November. The recent upsurge in crude oil and the consequent rise in product prices have resulted in under-recoveries on LPG touching Rs 138 per cylinder. However, measures such as these taken by the government to hike product prices by Rs 20 would help oil marketing companies reduce the subsidies burden by nearly Rs 14% to Rs 119 per cylinder at prevailing prices. We had not factored in any substantial hike in petroleum product prices for the current fiscal after the recent decision taken on November 4th. Therefore, we stand by our estimates although the short-term impact of the decision is likely to be negative.

While the rollback is not necessarily a negative per se, the direction of the government policies is very clear. By hiking petroleum product prices, it has shown its intent to bite the bullet, if necessary. Though some oil majors would continue to subsidise consumers, the government has managed to reduce its share of subsidies by hiking prices. To that extent, one should be positive.


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