India scrapped controls on diesel prices and increased natural gas tariffs in Prime Minister Narendra Modi’s biggest steps toward curbing subsidies, spurring energy output and reviving the economy.
Diesel will now be market determined and the price of natural gas will climb about a third, the government said yesterday.
Billionaire Mukesh Ambani’s Reliance Industries Ltd. (RIL), locked in a dispute with the administration over output levels from some gas fields, won’t get the proceeds of the higher tariff until the spat is resolved, the government said.
The changes build on Modi’s vow to revitalize Asia’s third-largest economy after sweeping to office in May, and precede local election results today that exit polls predict will cement his power.
The diesel step eliminates the risk of the administration and state-run crude producer Oil & Natural Gas Corp. (ONGC) bearing the brunt of such subsidies in future, while higher gas prices may spur investment in exploration.
“Diesel price decontrol and the increase in gas prices will benefit us and the Indian economy,” said D. K. Sarraf, the chairman of New Delhi-based ONGC.
The new gas tariff is $5.61 per million British thermal units from Nov. 1, up from $4.2, and will be reviewed half-yearly. Sarraf said each $1 rise in the gas price boosts ONGC’s annual profit by 23.5 billion rupees ($382 million).
State refiners cut diesel prices by 3.37 rupees a liter after the fuel was freed from controls, taking advantage of a 22 percent slide in Brent crude prices this year.
‘Seized’ Opportunity
“I’m glad the government has seized this opportunity to push through this much-awaited subsidy reform,” said Shubhada Rao, an economist at Yes Bank Ltd. in Mumbai. India had imposed diesel-price caps to keep the fuel affordable for the nation’s poor.
The cost of cushioning the tariff was about 4 trillion rupees in the past 10 years. Reserve Bank of India Governor Raghuram Rajan urged Modi to scrap the policy after inflation slowed and crude slumped.
Yesterday’s development is “good all around -- for refiners and the government’s budget deficit,” said Alex Mathews, an analyst at Geojit BNP Paribas Financial Services Ltd.
“It’ll be good for share prices of refiners,” he added. Diesel in India -- used for everything from cars to back-up power generators to agricultural water pumps -- accounts for 43 percent of petroleum consumption.
Stoking Competition
Ending price controls encourages private retailers to restart idle fuel pumps, and consumers will be the main beneficiaries of rising competition, said Lalit Kumar Gupta, chief executive officer of Mumbai-based Essar Oil Ltd. (ESOIL)
The policy change increases the scope for investment in exploration and production after Modi made achieving energy security a priority, according to Gupta.
Modi’s predecessor Manmohan Singh eased controls on petrol prices in 2010 and last year began boosting diesel prices by 0.5 rupees a liter each month. Fuel subsidies risk spurring imports as India gets about 80 percent of its crude from abroad.
The previous administration also approved a formor offshore blocks, said Abhishekula for roughly doubling gas prices, a decision Modi put under review. The revised natural gas price is “reasonable,” even for offshore blocks, said Abhishek Kumar, a London-based energy analyst at Interfax Europe Ltd.’s Global Gas Analytics.
Falling oil prices may help Modi narrow the budget deficit in the fiscal year through March 2015 to about 4 percent of gross domestic product instead of the targeted 4.1 percent, according to Mizuho Bank Ltd.
Subsidy Bill
India budgeted 634 billion rupees this fiscal year for petroleum subsidies -- including diesel, cooking gas and kerosene -- down 25 percent from the previous 12 months. India’s economy expanded 4.7 percent in the year ended March, close to a decade low.
JPMorgan Chase & Co. predicts a revival to 5.1 percent. Consumer prices rose 6.46 percent in September, the slowest pace since at least January 2012. While petroleum subsidies are coming down, they only account for a quarter of India’s 2.6-trillion-rupee subsidy bill.
Outlays on food are budgeted to rise 25 percent to 1.15 trillion rupees in the year through March. The subsidy bill rose fivefold under Singh as he implemented policies to buy farm produce at guaranteed prices, boost rural wages and distribute cheap food.
In his first budget in July, Modi left overall subsidy targets largely unchanged, while planning to create a commission that would recommend ways to better target food and fuel assistance.
“Deregulating diesel prices is an economically wise move as not only did the government pay a subsidy on it, but also there was wasteful usage due to artificially low prices,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. “It’s also a politically neutral move as all future governments stand to benefit.”
bloomberg.com
Diesel will now be market determined and the price of natural gas will climb about a third, the government said yesterday.
Billionaire Mukesh Ambani’s Reliance Industries Ltd. (RIL), locked in a dispute with the administration over output levels from some gas fields, won’t get the proceeds of the higher tariff until the spat is resolved, the government said.
The changes build on Modi’s vow to revitalize Asia’s third-largest economy after sweeping to office in May, and precede local election results today that exit polls predict will cement his power.
The diesel step eliminates the risk of the administration and state-run crude producer Oil & Natural Gas Corp. (ONGC) bearing the brunt of such subsidies in future, while higher gas prices may spur investment in exploration.
“Diesel price decontrol and the increase in gas prices will benefit us and the Indian economy,” said D. K. Sarraf, the chairman of New Delhi-based ONGC.
The new gas tariff is $5.61 per million British thermal units from Nov. 1, up from $4.2, and will be reviewed half-yearly. Sarraf said each $1 rise in the gas price boosts ONGC’s annual profit by 23.5 billion rupees ($382 million).
State refiners cut diesel prices by 3.37 rupees a liter after the fuel was freed from controls, taking advantage of a 22 percent slide in Brent crude prices this year.
‘Seized’ Opportunity
“I’m glad the government has seized this opportunity to push through this much-awaited subsidy reform,” said Shubhada Rao, an economist at Yes Bank Ltd. in Mumbai. India had imposed diesel-price caps to keep the fuel affordable for the nation’s poor.
The cost of cushioning the tariff was about 4 trillion rupees in the past 10 years. Reserve Bank of India Governor Raghuram Rajan urged Modi to scrap the policy after inflation slowed and crude slumped.
Yesterday’s development is “good all around -- for refiners and the government’s budget deficit,” said Alex Mathews, an analyst at Geojit BNP Paribas Financial Services Ltd.
“It’ll be good for share prices of refiners,” he added. Diesel in India -- used for everything from cars to back-up power generators to agricultural water pumps -- accounts for 43 percent of petroleum consumption.
Stoking Competition
Ending price controls encourages private retailers to restart idle fuel pumps, and consumers will be the main beneficiaries of rising competition, said Lalit Kumar Gupta, chief executive officer of Mumbai-based Essar Oil Ltd. (ESOIL)
The policy change increases the scope for investment in exploration and production after Modi made achieving energy security a priority, according to Gupta.
Modi’s predecessor Manmohan Singh eased controls on petrol prices in 2010 and last year began boosting diesel prices by 0.5 rupees a liter each month. Fuel subsidies risk spurring imports as India gets about 80 percent of its crude from abroad.
The previous administration also approved a formor offshore blocks, said Abhishekula for roughly doubling gas prices, a decision Modi put under review. The revised natural gas price is “reasonable,” even for offshore blocks, said Abhishek Kumar, a London-based energy analyst at Interfax Europe Ltd.’s Global Gas Analytics.
Falling oil prices may help Modi narrow the budget deficit in the fiscal year through March 2015 to about 4 percent of gross domestic product instead of the targeted 4.1 percent, according to Mizuho Bank Ltd.
Subsidy Bill
India budgeted 634 billion rupees this fiscal year for petroleum subsidies -- including diesel, cooking gas and kerosene -- down 25 percent from the previous 12 months. India’s economy expanded 4.7 percent in the year ended March, close to a decade low.
JPMorgan Chase & Co. predicts a revival to 5.1 percent. Consumer prices rose 6.46 percent in September, the slowest pace since at least January 2012. While petroleum subsidies are coming down, they only account for a quarter of India’s 2.6-trillion-rupee subsidy bill.
Outlays on food are budgeted to rise 25 percent to 1.15 trillion rupees in the year through March. The subsidy bill rose fivefold under Singh as he implemented policies to buy farm produce at guaranteed prices, boost rural wages and distribute cheap food.
In his first budget in July, Modi left overall subsidy targets largely unchanged, while planning to create a commission that would recommend ways to better target food and fuel assistance.
“Deregulating diesel prices is an economically wise move as not only did the government pay a subsidy on it, but also there was wasteful usage due to artificially low prices,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. “It’s also a politically neutral move as all future governments stand to benefit.”
bloomberg.com
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