Gas prices: U-turn calling

Gas price revision come FY20 is going to be one big challenge. This should not have been the case. Nearly 37 percent of the estimated revenue shortfall combined for SSGC and SNGPL owes to prior year(s) adjustment that never happened. No wonder consumers may end up facing gas price increase to the tune of 200 percent year-on-year (see: ‘Gas price – CPI perspective’ published May 29, 2019).

The combined estimated revenue requirement for both gas utilities for FY20 is Rs564 billion. It is higher by Rs70 billion or 14 percent over FY19. Mind you, the contribution of prior year adjustments not done is over one-third of the incremental price.

The current government has criticized and rightly so, the previous ones on their inability to not pass on the impact over the years. Surely, had that been done timely, the impact on inflation would not be as high as what it looks today. With the IMF programme under the belt, not passing on the shortfall may be a tough call.

But if any U-turn is needed, it is needed now, on holding some of the price increase in the domestic category. Not because it is populist right now, but more so because it is very doable, without large negative consequences on the bigger picture. Minus the domestic sector, the incremental revenue estimate based on proposed prices is Rs48 billion. That is nearly three-fourth of the additional revenue requirement.

This leaves another Rs24billion to be fetched from the domestic sector. A 20 percent year-on-year increase in average domestic consumer prices will reduce the differential to Rs15 billion. The government will have to decide whether an amount ranging from Rs15-25 billion is worth imposing on the domestic sector. Some would say it is, because of the privileges the domestic gas consumers enjoy over user of alternate fuels.

But in the larger picture, natural gas somehow has a telling weight in the CPI calculations. Are an additional Rs15 billion worth counting for, at the cost of a 200 percent rise in gas prices year-on-year? This will single-handedly send the CPI into double digits, all other things constant. And you all know what happens next. Another round of interest rate hike. Read higher interest payments. Higher fiscal burden. More inflation. All this for Rs15-25 billion? Think again. It will be best if the increase is spread in phases or some of it is passed on to the CNG sector.