Higher gas prices may not fuel inflation

The government's recent decision to raise the prices of administered natural gas by 12 per cent will have no direct impact on inflation.

"Natural gas" does not figure in the list of items covered under the wholesale price index (WPI), which is a measure of the general price level in the economy.

The secondary impact, if at all, is unlikely to be very strong, say economists. Neither steel, nor petrochemicals will be in a position to pass on the impact of a price hike to consumers.

The high input cost to fertiliser industries is likely to be passed on to the government, whose subsidy bill will go up.

The government, last week, took a decision to hike the administered prices of natural gas by 12 per cent, from Rs 2,850 per thousand standard cubic meters (tscm) to Rs 3,200 per tscm.

In case of power and fertiliser units, gas will continue to be supplied at this price, keeping in view its critical nature. Other sectors will see a shift market-determined rates over a period of time.

"From the point of view of the economy as a whole, a rise in gas prices will not hurt much. In the thermal category, which comprises coal, oil and gas, the bulk of energy requirement is met by coal," said Ajit Ranade, economist, Aditya Birla Group.

"There will be some passing on, but the impact will not be much," said Saumitra Chaudhuri, Economic Advisor, Icra.

"The fertiliser industry will pass it on and hence the government's subsidy bill will increase. In power, too, the proportion of gas-based power is much too small to make a significant impact," he added.

The steel industry is also not in a position to pass on the hike. "Steel prices are on the decline and demand is softening, so no one will be in a position to cut prices," Ranade said.

"Only some steel plants use gas as fuel. Others have been paying more for imported coal till now. The gas price hike has corrected the imbalance and it is unlikely that anyone will raise prices," Chaudhuri added.

"Domestic prices have been led by landed cost. Higher naptha prices mean that petrochemical companies have been enjoying an unearned profit. This gas price hike will rationalise the system. There is no possibility of hiking output prices," said Nagarajan Narasimhan, head of research, CRIS INFAC.

In the power sector, gas-based production is only 7 per cent of the total electricity generation. Hence, the overall impact of higher fuel costs and tariffs is not expected to be major.