New Delhi: The Union government can subject domestic natural gas, a key input in fertilizer production, to the scope of the windfall tax, making its treatment of the product consistent with the way it treats the locally produced crude oil and fuel exports as it explores various options to meet rising subsidy bills for fuel, food and fertilizer, two people with knowledge of the development said.
This is one of several proposals being considered to mobilize additional resources, with the government’s fertilizer subsidy alone expected to exceed ₹2.5 lakh crore in FY23, a jump of more than 138% from the budget estimate (BE), they added, requesting anonymity.
Both people said it was possible that, if accepted, the proposal could have retroactive effect.
Union Finance Minister Nirmala Sitharaman, who is in the United States, said in a conversation with economist Eswar Prasad on Tuesday that disruptions in global fuel supplies have had an impact on prices fertilizer, one of the main inputs for millions of poor Indian farmers. “There are things going on outside that definitely hit us…, Fertilizer, it’s at great risk. Last year we had to give 10x [ten times more] the price on [its] imports, and obviously Indian farmers are still not really big farmers [who can afford it],” she says.
The Cabinet on Wednesday approved a one-time grant of ₹22,000 crore to state-run oil marketing companies that took a hit on cooking gas between June 2020 and June 2022, a jump of 450% from ₹Direct transfer of 4,000 crore of LPG subsidy to BE for 2022-23.
The government has also extended its enhanced free grain program for another three months until December 31, with an additional financial implication of ₹44,762 crore, which is additional ₹80,000 crore has already been spent so far in 2022-23, the two added.
“The government is committed to protecting farmers and disadvantaged sections of society from rising prices, which are mainly due to factors beyond its control, such as supply chain disruptions due to war in Ukraine and the decision of world oil producers to keep fuel prices artificially high. Under such circumstances, sectors with windfall gains should contribute part of their windfall profits for the common good,” one of the two said.
Since July 1, the government has imposed a windfall tax on domestically produced crude oil and gasoline, diesel and jet fuel (ATF) exports. It adjusts these levies every fortnight according to the volatility of their respective prices. So far, it has spared natural gas from the scope of the windfall tax.
Prices for locally produced gas, which are tied to international benchmarks, have also risen significantly due to supply problems caused by the war in Ukraine and Western sanctions against Russia, a second official said. “As this increase in profits is a pure boon, at no additional cost to the producers, they must share some of it with the government to protect the poor from rising fuel and fertilizer prices,” he said. .
India has two types of natural gas pricing regimes – one for gas produced from difficult terrain or deep water deposits, and the other from blocks elsewhere. In the six months to September 30, prices for the first type increased by 26% and prices for the second by 41%. Current prices for both are $12.46 per unit and $8.57 per unit.
Ministries of Finance, Oil, Fertilizer and Gas Producers and Distributors Oil and Natural Gas Corporation (ONGC), Oil India Ltd (OIL), GAIL India Ltd, Vedanta Group and Reliance Industries Ltd (RIL) did not respond to email. questions about this.
Two industry experts working for gas producers said on condition of anonymity that the idea of imposing a windfall tax on household gas is not justified because gas prices are set by a formula approved by the government. “Additionally, the price of gas produced from the deepwater blocks is just over $12 [per unit], which is significantly lower than international gas prices hovering around $40. As producers are denied the market price, there is no reason to impose a windfall tax,” said one.
“In the case of domestic crude oil, producers receive around $80 a barrel after paying the windfall tax. But in the case of natural gas, the current price equates to just $70 a barrel, so no wiggle room,” he said.
A second expert said there was no correlation between fertilizer subsidies and locally produced natural gas, as imported LNG is mostly used in fertilizer plants. The fertilizer industry requires approximately 45 million standard metric cubic meters per day (mmscmd) of gas. While 15-18 mmscmd is covered by long-term LNG contracts, around 15 mmscmd of gas is supplied by state-run domestic producers such as ONGC and the balance is purchased on the spot market.
SC Sharma, an energy expert and former special duty officer at the former Planning Commission, said: “The government has formed the Kirit Parikh committee on gas pricing and no decision has been taken. [on windfall profit tax] is possible until the recommendations of the committee are available.
He added: “Unlike oil, natural gas prices in India are not market driven and are determined on the basis of a formula which does not reflect true status, India being a nation heavily dependent on energy imports The exceptional tax is not a correct measure because the majority of the gas is either produced under PSC [production sharing contract] scheme plus imported LNG. Additionally, companies failed to create long-term LNG contracts between 2019 and 2021 when LNG prices were low.
Parikh suggested that the fertilizer sector should also improve energy efficiency and also increase domestic urea production. “If the government offers 10% fertilizer subsidy to promote biofertilizers, it can make a big difference,” he said.
“Gas pricing is not the major problem, but not increasing fertilizer prices for more than 20 years is a major problem for subsidies. The government must strike the right balance, and fertilizers being a strategic sector [gas] allocations to the electricity sector could also be diverted from the electricity sector to the fertilizer sector.