What prompted Government to deregulate diesel and revise gas price?

New Delhi: The Narendra Modi-led government’s market pricing of diesel and revising the price for domestic natural gas have been determined by international factors that have also cushioned the impact of tough economic decisions.

While diesel deregulation has come in the backdrop of international crude oil prices plunging towards $80 a barrel, the new formula used to revise gas price has dropped the Japanese reference price and substituted the Alberta (Canada) hub price in place of the Henry Hub prices employed by the Rangarajan committee formula.

Accepting the recommendations of the Rangarajan panel, constituted by the previous UPA government, gas price would have been raised to $8.4 per unit instead of the $5.6 announced Saturday that will be effective from November for six months.

The market pricing of diesel, after years of selling below cost and at a time of falling international crude rates, means that diesel is cheaper by over Rs.3 per litre.

Allowing for local taxes, diesel is selling effective Sunday at Rs.55.60 in Delhi, Rs.63.54 in Mumbai, Rs.60.30 in Kolkata and Rs.59.27 in Chennai.

Diesel prices have been raised monthly by 50 paise a litre in line with the government’s January 2013 decision. Rates have cumulatively risen by Rs.11.74 per litre in 19 instalments since January 2013.

While the government was keen to pass on the benefit of cheaper oil to consumers, it was hesitant to free diesel prices just before the assembly elections in Haryana and Maharashtra.

Indian industry welcomed the diesel price decontrol as a highly progressive move.

“The price of fuel products such as diesel should reflect the true market value and this would also encourage all users to economise on their diesel consumption and hence align with the objective of promoting environmentally sustainable growth,” Sidharth Birla, president of industry chamber FICCI, said in a statement.

Industry, however, has not yet reacted to the new gas price, arrived at after changing the international hub references, because it has been asking for at least a doubling to a little over $8 per unit.

Speaking to reporters after the cabinet meet, Finance Minister Arun Jaitley said: “The original natural gas price was $4.2 per unit; the Rangarajan Committee has followed a particular criteria and announced a price of $8.4 per unit. We reviewed the entire criteria. We looked at the various hubs which have been considered and those that have been ignored.”

There has been opposition to the Rangarajan formula from various quarters on account of its likely impact on electricity tariff, urea cost, CNG rates and piped cooking gas price.

Every dollar increase in gas rates will lead to a Rs.1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff. There would be a minimum Rs.2.81 per kg increase in CNG rates, and a Rs.1.89 per standard cubic metre hike in piped cooking gas cost.