LNG customs duty cut does not soothe enough nerves

Finance Minister Arun Jaitley’s move to reduce the basic import duty on liquefied natural gas (LNG) to 2.5 per cent from the current 5 per cent will make the fuel cheaper by about 20-25 cents. But, consumers such as power producers are far from satisfied.

Imported gas is mainly used for commercial and industrial purposes. Therefore, the price of gas for transport (compressed natural gas) and cooking (piped natural gas) is unlikely to see a significant change. In fact, critics say the reduction in duty is just another artificial way of keeping the domestic price under control.

In India, domestically produced gas price is administered by the government.

The country has almost 24,000 MW stranded gas-based power plants. The government has made attempts earlier to import gas for them at a subsidised rate and succeeded in firing off the plants.

The scheme which was to end this year did not get to see much action in the last round of bids as gas prices were at comfortable levels.

However, the true story is that the players were taking advantage of the VAT exemptions and lowered transportation charges, which came along with the scheme.

Power plants were to bid for the lowest amount of subsidy required while keeping power tariffs constant. The last rounds of the auction saw companies forgoing subsidy, hinting that producers were comfortable with the price of gas if incentives continued.

According to industry watchers, fuel costs account for 75-90 per cent of the cost of running a gas-based power plant at current prices. Adding to this is the depreciation of the rupee compared to the dollar, making this offer from the Finance Minister not so attractive, said Amarthaluru Subba Rao, Executive Director, Finance and Strategy at CLP India.

Rajiv Agarwal, Secretary, Indian Captive Power Producers Association (ICPPA), said: “The bigger concern is the availability of gas in the country. The customs duty cut is a marginal cushion compared to the globally firming up gas prices.” Director General at the Association of Power Producers, Ashok Khurana, said: “The country needs 100 mmscmd of gas (assuming that the need for 4 mmscmd per 1,000 MW) to run the plants. Gas-based power plants are currently getting only 11 mmscmd, the balance capacity has been left stranded or has to depend on expensive imported LNG. We had sought for complete removal of basic customs duty of LNG to support gas-based power plants. The marginal reduction is not enough to keep the sector afloat.”

However, Minister of State (Independent Charge) for Power, Coal and Renewable Energy, Piyush Goyal, said: “Most of the power sector is self-sustaining and the costs of renewable energy have been brought down due to competitive bidding. The power and mining sectors have got all that they had asked for in the Budget.”