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Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
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Gas price hike: Get the formula right 
(Wed, 2 Jul Pre-Open) 
 
Last week brought with it a reality check for oil and gas stocks when decision on gas price hike was deferred for three months. These stocks had witnessed a significant run up in prices mainly because of the reform theme and the Modi Government taking charge at the centre. However, the ground realities came to the fore and a correction in stock prices ensued. The gas prices were first supposed to be hiked by 1st April 2014. However, the move has been postponed twice - first due to the election code of conduct. And now, the new Government wants to assess the issue and will be coming up with a decision in the next three months.

Despite being the back bone of the economy, the oil and gas sector in India has been a victim of poor policies that have curtailed investments. Regulations like administered fuel prices for gas and diesel and other fuels have led to losses for the concerned companies. While we have already been short in oil supplies, even the gas supplies have dried up over last few years. One of the reasons is lack of incentives. The exploration companies do not find gas prices remunerative enough for their investments.

There is no doubt that supply and demand factors should be reflected in the pricing. However, the chances that supply from existing fields in India has purposely been curbed can not be ruled out, so that higher prices can be fetched for gas in future once gas price hike decision comes into effect. This we believe is unfair. After all, assets being considered here belong to the nation. These have been allocated to companies after mutual consensus with regards to contracts. Going forward, the Government should ensure discipline and delivery on commitments where national resources are concerned. Further, while rationalizing prices, it should also make sure that personal interests of some producers do not get promoted at the cost of national interest and tax payers' money.

Also, the formula that will be used to arrive at new price should be kept transparent. And no element that is not relevant to India and has an inflationary impact should be included. In fact, focus should be on a rate of return that leaves enough incentives for explorers after considering exploration and other costs, rather than using benchmarks that are irrelevant. We hope these three months will be used well by the Government to rationalize gas prices and give a major boost to the energy sector in India.

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