Natural Gas Pricing in India

Pricing of natural gas in India suffers from asymmetry because of the presence of limited suppliers having byzantine contracts. The oligopolistic market combined with price regulation results in welfare losses, and market failure. We argue that for the sake of long-term development of natural gas sector in fast developing economies like India, the long-run marginal cost (LRMC) seems to be the most suitable pricing policy. In the case analysis, we present a theoretical framework of calculating LRMC while acknowledging that the conditions necessary for a ‘first-best world’ rarely exist. We conclude that it is very much possible to gradually move from the existing ad-hoc pricing mechanism to a more robust LRMC regime that takes into account not just the production cost but also a scarcity premium as well as any externalities resulting from the natural-gas fuel cycle. The outcome based on our model compares very well with the one from the Rangarajan Committee's formula that got the government's nod recently for fixing of price of indigenously produced natural gas, to be effective from 01st April 2014.