Pricing mismanagement

The market is the most efficient allocator of resources, though not the most humane. Every civilised society is therefore forced to "tinker" with its perfection. The trick to a successful re-allocation of resources through such tinkering is to ensure that it is scientific, rather than ad hoc, and transparent. Unfortunately, neither canon is adhered to in the pricing of petroleum products like petrol, diesel and kerosene, where the government has moved from tinkering to mismanagement with a rag-tag patching of pricing policies, which is entirely ad hoc. This needs to be avoided as the country looks at the pricing of another important fuel: gas.

True, India is sitting on significant reserves of gas in the Krishna-Godavari basin. It is currently a gas-deficit country having enough gas to feed just about half the demand of about 50 million tonnes a year. The gas finds could catapult India to a gas-surplus state in the next couple of years. What should be the pricing of this gas? The government had committed itself to a "market-determined price" when exploration blocks were auctioned off. However, given that the main consumers of gas""fertiliser and power companies""are operating in a price-controlled market, there is a demand to further "tinker" with the system to ensure that the pricing is on the lower side (read subsidised).

The impact of such artificial depression of prices can be seen in the coal industry. The prices of coal""the main fuel used in the power sector""have not been revised for a few years. That the coal industry also needs funds to increase production and modernise is conveniently ignored, as is the fact that the skewed pricing signals that there is no attempt to economise the use of coal, which could run out in 40-50 years.

The gas industry could be headed for a similar downward spiral but for the fact that the government also gets a share of revenue generated from the gas sale and thus has an interest in a market-linked price. However, a higher price means that the government's subsidy bill for power and fertilisers would increase by almost Rs 88,000 crore ($22 billion) over the next 15 years, while the gain from the higher pricing is limited to Rs 34,000 crore. So from a budgetary point of view, it makes sense to force a lower gas price, though it would have negative implications for future auctions of oil and gas blocks for exploration.

What the government should ideally do is pry open the whole chain of subsidies at this juncture and move to a market-determined pricing formula for every commodity, including fertiliser. That may be wishful thinking given the political sensitivities involved. But there is no way but to gradually end the skewed price signals in the market that have led to, for example, an overuse of urea in farms, which has had an adverse impact on the long-term productivity of the soil. A more efficient allocation of resources in the economy would lead to a more productive economy.