Govt to gain $2.2 billion from gas price hike: Merrill Lynch

NEW DELHI: The government will gain about $2.2 billion (about 13,000 crore) in higher taxes and profit share from its decision to nearly double natural gas prices to $8, Bank of America Merrill Lynch said in a report.

The Cabinet Committee on Economic Affairs (CCEA) had on June 27 approved raising natural gas prices from April 2014 to an average of prevailing rates at international benchmarks and cost of imported LNG into the country. The indicative price in April is likely to be $8 per million British thermal unit as against $4.2 currently.

State-owned Oil and Natural Gas Corp(ONGC) and Oil India Ltd, which account for bulk of natural gas produced in the country, will gain an additional Rs 18,100 crore ($3.1 billion) annually, BofA Merrill Lynch said in the report.

About 65% of ONGC-OIL's rise in revenue from gas price hike would go to the government as higher royalty, income tax, dividend and dividend tax.

Of the total gains, "65% would go to the government. Rise in KG D6 gas price of Reliance IndustriesBSE 1.97 % would also boost government royalty and income tax revenue by $200 million," the report said. This "$2.2 billion revenue rise from gas price hike would be used to fund rise in subsidy," it said.

The report said finance minister P Chidambaram had while announcing the CCEA decision stated that no decision has been taken on the input price of gas to user industries of power and fertiliser.

"Although no decision on input price for consumers has been taken, subsidies may be considered for some. The investor concern, therefore, is that subsidies to gas consumers like power producers could imply lower gas price to PSU gas producers - ONGC and OIL," it said.

Stating that some gas consumers are already subsidised by the government, it said, "We believe that even in future the government would bear any rise in subsidy. In our view, the rise in government revenue ($2.2 billion assuming gas price goes up to $8) from gas price hike would fund any rise in subsidy."

It said if the producers were to bear the subsidy and effectively get a lower gas price then there was no incentive to invest more in exploration and production, which is the main reason for the gas price hike.

Gas consumers in North East and fertiliser producers are subsidised even now. This subsidy is borne by the government and it does not mean lower gas price for ONGC/OIL. Consumers in North East pay 60% of prevailing gas price while OIL, the main gas producer in the region, collects balance 40% of the gas price from the government.

"The proposed gas price hike is not the first gas price hike. Gas price was hiked in 2005 and has gone up by 2.6 times in FY10-13. Subsidies went up when price hikes were made and were borne entirely by the government," it added.