Natural Gas in India: An Analysis of Policy

In 2010, the Indian government increased the price of ‘administered’ gas to more than double its previous level, in a significant policy change. This move, whilst appearing to signal a reduction in distortions on one side of the policy equation (that is, the price paid to gas producers by marketing and retailing companies), highlights distortions on the other side (the complex subsidy regime for prices paid by some gas users to retailers), essentially pushing the focus onto downstream consuming sectors. This paper argues that the transition in the gas sector is part of the larger movement of the economy from a centrally planned and administered system to one based on market principles. During transition, the situation cannot be understood simply in terms of the conventional paradigm of demand and supply being brought into balance by price. Demand and supply are influenced by different factors, but have been kept broadly in balance by the complex system of administered pricing and quantitative allocation. The resulting distortions have been spread across the gas consuming sectors – notably power and fertilisers. As distortions mount, parts of the system are modified, usually in the broad direction of liberalisation and reform. But partial reform often has the effect of displacing the problems, presenting further challenges, and requiring further changes. Large changes in the pricing and allocation of gas cannot therefore occur without finding other ways of addressing distributional objectives. The paper argues that official forecasts of demand and supply, although optimistic, are based on a ‘planner’s outlook’, and a better assessment of the role of gas may be found in the price competitiveness of gas with alternative fuels in its main consuming sectors. It draws from experience in the oil sector, where prices were liberalised in 2010 for all but the poorest segments of consumers – thus in gas, the paper argues that there is a case for considering market prices in the gas sector, and providing the subsidy directly to the end-user in the fertiliser sector, where the distributional concerns appear most significant. The paper argues that although reforms are taking place, the current situation is essentially a half-way house, and it suggests ways forward from this through the resolution of specific problems on the supply and demand sides.

By: Anil Jain , Anupama Sen