Gas price hike plan could face hurdles

By Nidhi Verma

NEW DELHI (Reuters) - India's plan to hike gas prices by about a third as it edges toward market rates promises relief for hard-pressed state energy firms, but will draw flak from fertiliser and small business lobbies worried over input costs.

Nearly two decades after kicking off market reforms, India has eased controls on most sectors of the economy, but still sets the prices of petrol, diesel, cooking gas, kerosene, natural gas and fertiliser.

The oil ministry's plan for the biggest jump in administered prices ever, and the first in 5 years, will boost profits for Oil and Natural Gas Corp and Oil India Ltd, and generate funds to extend the lives of their depleting oil fields.

"A gas price rise will be a positive signal for the investor community that India is moving towards market-oriented prices, but the only immediate victim would be small industries, which may find it difficult to pass on the rising input cost," said Manish Baghla, a senior manager at PricewaterhouseCoopers.

The hike in the administered price, which applies to the 40 percent of India's gas output of 140 million standard cubic metres a day (mmscmd) that is sold mainly to power and fertiliser firms, is a key step towards reducing distortions in a market with more than a dozen rates.

While power companies can pass fuel costs on to consumers, fertiliser firms get a government subsidy for higher input costs.

"The government wants to cap the subsidy for fiscal management and any increase in input costs will raise the subsidy burden. There will be a problem in allocation of the subsidy," said a fertiliser ministry official.

"In 2009/10 the subsidy for the fertiliser sector is fixed at 500 billion rupees and we are seeing a shortfall of at least 200 billion rupees."