My criticism of the gas pricing formula recommended by the Rangarajan Committee is based on the absence of a natural gas market in India and the fragmented/non-fungible global gas market. A market, and hence a market price, can only exist when full fungibility is assured and multiple buyers and sellers compete freely under rules established by enlightened, independent and watchful regulators. This is not the case in India for gas or any competing energy source. Globally, only the North American gas market exhibits these essential characteristics. I believe the Rangarajan Committee and indeed Sunjoy Joshi accept this truth and support the need for an administered price for Indian Natural Gas producers.

My criticism is not that the Rangarajan Committee chose numbers from foreign markets but that it chose numbers that do not reflect prices obtained by natural gas producers in the three markets covered. The absurdity of its formulation is best demonstrated by the inclusion of Japan that has no natural gas producer/supplier. “Curiously,” perhaps inadvertently, Mr. Joshi supports my arguments by trashing the Indian Natural Gas producers’ demand for import parity based on the economic principle of marginal cost of the highest price gas (LNG at “$15/mmbtu”) absorbed by willing Indian buyers. European Natural Gas producers do not get such parity even though LNG accounts for about 30 per cent of all European gas imports. Neither do American Natural Gas producers, even though America still imports some LNG.

Having failed to disagree while ostensibly arguing against my stand, Mr. Joshi shifts focus to issues of PSCs and subsidies that were not a part of my criticism. The landmark judgments of the Bombay High Court and the Supreme Court of India conclusively establish that Mr. Joshi’s interpretation of PSCs is incorrect. The government not only has the right but indeed the obligation to regulate both the price and distribution of natural gas produced in India.

Coming to the bogey of subsidies, one cannot talk of subsidies in isolation of the annual Central and State Taxes/Levies on the energy sector. As an example, about 22 per cent of diesel produced in India is exported at a price that is well below the “subsidized” price paid by the Indian consumers at the pump. The Central and State governments simply take a massive cut from the top of what Indian consumers pay before passing the balance to domestic producers, resulting in the so-called “under-recoveries.” The Central government does not stop here; it then passes 40 per cent of the burden of “under-recoveries” to publicly traded state owned upstream oil companies that Mr. Joshi believes receive an international price for crude.

To answer Mr. Joshi’s question “Why blame the hapless Committee”; I blame it for not addressing the anomalies/distortions plaguing prices paid to Indian Natural Gas producers. The committee has, instead, inflated the distortions at the cost of my fellow suffering Indians.

(Surya P. Sethi, formerly Principal Adviser, Power & Energy, Government of India, is Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.)

More In: Comment | Opinion