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As against the C Rangarajan panel's recommendation, made public early last year, to double the price of natural gas, the Union government has decided on a lesser rise.
However, says Rangarajan, who was head of the then prime minister's economic advisory council, it appears the principle behind his panel's suggestion has been accepted.
Rangarajan, chairman of the Madras School of Economics and former governor of the Reserve Bank of India, was speaking to reporters on the sidelines of the 1st Annual Chennai Lecture Series organised by the Rotary Club of Chennai Carnatic. He said: "Basically, they have accepted the principle underlying our formula, namely the boarder price should be taken as an approximation for the competitive price. Apparently, they have taken other prices also into account than what we have suggested. I have not seen the details on the basis on which the government has (decided)…It appears that they have provided some additional incentives for exploration in deep sea areas. That will mean an extra to explorers beside the price. Therefore, it all depends upon whether it is attractive enough for explorers." On the decision to exclude Japanese prices from the formula, he said it had very little weight even in the committee's formula.
The government had added some other data, such as from Russian and Canadian hubs, he said.
According to an announcement by the Centre on Saturday, the Cabinet Committee on Economic Affairs, chaired by Prime Minister Shri Narendra Modi, approved a new domestic gas pricing policy, with the upward revision about 75 per cent less as compared to that arrived at by using the Rangarajan formula.
Around 80 per cent of the additional revenue due to the revision will go to government companies and the government will get additional revenue of around Rs 3,800 crore annually with higher royalty, higher profit on petroleum and higher taxes. For all discoveries after this decision, in Ultra Deep Water Areas, Deep Water Areas and High Pressure-High Temperature areas, a premium would be given on the price, on a prescribed procedure.
Answering the audience after delivering a lecture on 'The Indian economy - past, present and future', he said one also needed to look at what weight the government gives to imported gas while determining the formula. The new $5.6 a unit is still much lower than what we pay for imported gas, he said.
On diesel price deregulation, he said it had come at the right time, accompanied by a reduction in the price. He added that the subsidies on cooking gas should also be brought down.
'Tough decisions needed'
Delivering the lecture, he said the target of containing the central government's fiscal deficit to 4.1 per cent of gross domestic product (GDP) this year will mean several policy decisions which might not be popular. The subsidy regime, for instance, needs reform in three directions. First, there has to be a fix on the total amount as a proportion of GDP. Second, these need to be targeted, only directed to vulnerable groups. Third, there has to be a rethink on the appropriate delivery system.
With export increasing and the increase in import having been contained, the trade deficit seems likely to come down from $77 billion in 2013-14 to $70 billion in 2014-15. However, the current account deficit might remain at last year's level, he said. A fiscal deficit of 2.5 per cent of GDP will require capital flows annually of the order of $40-60 billion in the next few years, which might be around five per cent of the capital flows to emerging markets. The level can be expected to materialise and requires policy action such as taming inflation to ensure export competitiveness, fiscal consolidation, proper pricing policies and decision to help raise the domestic production of coal.
Priorities
He said two sectors posing a major challenge are the farm economy and the power sector. A decline in agricultural production can cause serious distortions in the economy and it is imperative the country should aim at GDP originating from agriculture and allied activities growing at four per cent yearly. And, aggressive capacity creation is required in power.
Good government is at the very heart of economic growth and poverty reduction, he added. He said the country must learn to walk on the two legs of growth and social development. If India grows at eight to nine per cent annually, per capita GDP should rise from the current $1,600 to $8,000-10,000 by 2025. Growth is the answer to many of the socio-economic problems, he added.
