It would be both in the interest of producers and consumers to allow market forces to decide the price of a natural resource. Instead, the Government distorts the situation, as in the case of the KG basin, by playing God.
Market is in some sense like the snake. Plight your troth with it, you can partake of all the joys that the union has to offer, as Tantric philosophy would have it. But cross swords with it, then it can turn vicious as only a snake can, when cornered.
The erstwhile Government in West Bengal, led by the Marxists, learnt this to their cost in Singur. Now, the UPA Government at the Centre is realising to its dismay the wisdom of this assertion as it is engaged in a messy dispute with Reliance over falling gas output at the off-shore basin of the Krishna Godavari rivers.
Landing in problems
What did the Left Front Government do when it came to power? It gave the land away to share croppers and tenants as part of its programme of giving land to tillers. Now, it could have done the Christian thing of nationalising the land belonging to the existing land owners, paid them a fair compensation and then reassigned the land to whosoever it wanted.
That would have been the market solution to the problem of landless farming families. But no, it wanted to be very cute at the expense of landowners. It simply passed a law saying that existing cultivators cannot be alienated from their lands. Since land wasn't actually acquired, there was no question of compensation.
Unable to enforce their ownership rights, landowners lost interest in documenting changes. Four decades later, you had all kinds of changes as to who cultivated the land and who owned each parcel of land. When Tatas landed up and started putting up their sheds for a car plant, all hell broke loose. You had all manner of claimants to the land sprouting like mushrooms after a spell of rain. The rest, as the cliche goes, is history.
Ditto with the Reliance controversy. Reliance quoted $1.8 for a unit of gas in an open tender floated by the public sector power generation company, NTPC.
A market benchmark was thus established in the process. Hereabouts, the warring Ambani brothers entered into a family settlement by which the same price was used as a benchmark for the supply of gas by Reliance to a natural resource company, now controlled by the younger brother, and one in which the minority shareholders of Reliance owned shares in the same proportion as they did in the parent company.
The agreement between the brothers now somehow came unstuck, leading to a full-blown legal mess.
The Government now had the option of preferring to stay in the sidelines and letting the process of market forces to intervene and sort things out.
But it couldn't resist the temptation to play ‘God' or, rather arrogate to itself the power of the market and determine the price. Whether it did so to oblige the elder of the two Ambani brothers is a matter of pure speculation.
What is of interest is that the Government chose to interfere with the market process and said four dollar-something is the price for a unit of gas. This was fine when the market price for natural gas was around that level. But prices in the global markets since then have nearly trebled.
Can you fault Reliance if it wants a higher price for the gas it is extracting from the KG basin? To be fair to it, it is not saying so quite explicitly. But that is exactly the point. If it is not demanding a higher price, then it should.
Indeed, one could go so far as to say that the management of Reliance Industries must, in the interest of minority shareholders, demand of the Government that it be allowed to market gas at whatever price it can get and to whoever was willing to pay it that price.
The adherence to highest principles of corporate governance demands nothing less.
The Government too must desist from making meaningless assertions like “KG basin gas is a national asset'', and so on. Nothing can be more ridiculous than that. Can the Government say that the Rajasthan oil or Raniganj coal isn't a national asset? If it is, would the Government then fix its price as well?
At the end of the day, what would satisfy the general public is an arrangement where the market decides what is the best price, and the choice of customer is decided based on who is willing and able to pay that price. Otherwise, suspicion will linger in the public mind that the output is artificially suppressed.
If the output is falling, it is because the operator has every reason to hold back on production now and wait for the current contract to run its course, so that, under a new contract, the prices could be aligned better with international trends.