At long last, the inertia on gas tariffs has shaken. Almost three years after the previous change, the government has finally raised the natural gas tariffs, as notified by Ogra.
As was widely anticipated, the sector that has faced the biggest hit is the fertilizer sector. The sector saw a 62 percent increase in its primary raw material feedstock gas, with exceptions aside. This is in addition to the recently imposed - yet not implemented (but accounted for) GIDC levied earlier this year.
At Rs200/mmbtu, the feedstock gas is still priced at one-third of the general industrial rates. The average tariffs for other industries such as power and gas used as fuel by fertilizer players have been raised by 23 percent. This still leaves much wanting in terms of eradicating the cross-subsidy that the sector has had for ages.
The notification will follow a predicted pattern of countless SOS messages, appeals, please, notices and news paper advertisement campaigns from all and sundry - citing the hike as brutal, unfriendly and other cry wolf statements. But this one is here to stay. Recall that the IMF has been ditched at least thrice on the issue. Politicking and lobbying are unlikely to bring about a reversal in the decision.
On the prices front, expect the impact to trickle down. Channel checks suggest the fertilizer companies have already raised the price by around 9 percent. The cement firms have also reportedly raised the bar by Rs85 per bag.
Recall that fertilizer cost accounts for roughly half the farm input cost. A 62 percent rise in feedstock gas price would roughly translate into an 8-10 percent increase in urea price. Such a rise in the 50 percent cost component would lead to a 5-6 percent increase in farm input cost. This would require the major crops support prices to go up by at least the same quantum. Mind you, the farmer's economy is already worse of, as they face high input cost and don't get good prices in return. Compare the situation to that in India, where fertilizers are heavily subsidized, and the local farmer will certainly be under greater pressure.
This is of course assuming the fertilizer players are able to pass on the entire impact, which they have in the initial reaction. They have - in the not-so-distant-past - clearly stated the intent to pass it on. Recall that the fertilizer industry's pricing power has been tested in the recent past, and the industry ended up taking a hit on their margins. No matter what they say, expect the government to intervene at some point to bargain a lower price.
So while the price hike will definitely have an impact on food prices, the most affected entities are likely to be the fertilizer manufacturers. Those enjoying gas at concessionary rates would be the ones dictating the price this time around.
Tailpiece: Petroleum prices
"Sales tax to be rationalized by ensuring standard rate for all items and broadening the scope of sales tax," reads the PML-N 2013 election manifesto. Sales tax increased from 20 percent to 25.5 percent on MS, 17 to 24 percent on HOBC, 20 to 30 percent on Kerosene and 36.5 to 45 percent on HSD - reads the latest FR SRO following the petroleum price notification. Mind you, it all started from 16 percent, a few months back.
Consider this, consumers are now paying 25 percent extra on HSD and 8 percent on petrol, when adjusted for the higher GST slab. Agreed that GST on petroleum products is a vital category for the FBR and the fiscally strapped economy does need such measures. But there has to be a limit on it. Depriving consumers the surplus to this extent, which now runs in tens of billions over the past few months is highly uncalled for. The tax incidence on diesel and petrol now stands at 43 percent and 31 percent respectively.

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