Pricing Reforms in The Natural Gas Sector of India: A Computable General Equilibrium Analysis

Natural gas as a source of clean fuel is important in many economies. With the increase of trade in gas led by LNG trade, market integration as occurs in other sectors is being promoted in various regions of the world. However, in India, the objective to address distributional concerns and domestic economic growth superseded the reform agenda with India adopting the market intervention approach of controlling energy prices. The policies were greatly focused towards the allocation of natural gas to priority sectors, like fertilizer, city gas distribution, power, etc., at affordable prices as the output prices of these sectors are subsidized. The interlocking of subsidies of the demanding sector and ad hoc pricing procedure adopted for gas pricing has resulted in a distorted market. As a result, natural gas share in primary energy consumption in India is about 8% as compared World average of 24% (2013). This paper examines the impacts of price reforms in the natural gas sector. In particular, the paper attempts to quantify the impacts of sequencing the pricing reforms under three plausible scenarios: (a) introduce upstream price reform without introducing reforms in the consuming sectors, i.e., fertilizer, power sector and city gas distribution; (b) introduce price reform along with partial reforms in downstream reform by removing the prioritized gas allocation policy and allowing consuming sectors to pass the increase in energy price to the end-users and introduction of full reform, i.e., price and quantity. Further, to stimulate the decision-making process for resolving the issues, the paper proposes policy recommendations.