Mumbai: India promised to protect key industries from the full impact of higher gas prices on Friday, taking the shine off a reform which may bring in more investment to the gas sector but could hike costs for consumers by around 50 percent from next year.
Asia's third-largest economy took the unpopular step of approving a gas hike for the first time in three years on Thursday to encourage investment in domestic output of the resource and to boost imports as it struggles to cure a chronic power shortage that besets industry with blackouts.
But higher gas prices, on the heels of an increase in coal costs agreed last week, could translate into higher power costs for consumers and more costly fertilizer for farmers, which could cost the government votes in elections due by next May.
"Power has to be produced at an affordable price, fertilizer has to be produced at affordable prices. Those issues will be addressed," Finance Minister P Chidambaram told a news conference, adding prices could be ‘tweaked’ for these sectors.
India, the world's fourth-largest energy consumer, wants to double the proportion of gas in its energy mix by 2020 from 10 percent now. It uses coal for nearly 56 percent of its energy needs, while oil, mostly imported, accounts for 26 percent.
But the government is treading a fine line between populist measures such as plans to expand cheap food distribution and painful reforms to shore up state finances and halt a slide in the rupee, which hit a record low this week.
"The weak currency is acting as a blessing in disguise, as it will prevent the government from engaging in pre-election populism and encourage it to continue with supply-side reforms," Nomura economists said in a note on Friday.
OIL & GAS SHARES JUMP
For energy companies that have gas production, the price hike would boost profits.
"The rise in gas price will ... encourage the upstream companies to invest in exploring more challenging frontiers to augment gas production," Sudhir Vasudeva, chairman of the largest state producer, ONGC (ONGC.NS), said in a statement.
Oil and Natural Gas Corp (ONGC) shares were up 3.2 percent by 0921 GMT, while Reliance Industries (RELI.NS), which operates the country's biggest gas block off the east coast along with BP Plc (BP.L), gained 3.6 percent in a strong Mumbai market .BSESN.
ONGC expects to add about 80 billion rupees in profits annually thanks to the increase in gas prices, its finance head said.
Oil India said it is likely to add about 10 billion rupees in profits annually.
Billionaire Mukesh Ambani's Reliance, which has seen a slump in gas output from its KG D6 gas fields, has said gas prices need to be increased in order to encourage further investment.
"We project upside of 39 percent for ONGC and 20 percent for Reliance for our FY 2015 earnings estimates. At constant currency, we estimate the earnings upside at 26 percent for ONGC and 4 percent for Reliance," Morgan Stanley analysts said in a note on Friday.