India looks to cushion power firms from gas hike

By Prashant Mehra and Jo Winterbottom

MUMBAI/NEW DELHI | Fri Jun 28, 2013 4:42pm IST

 

(Reuters) - 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 fertiliser for farmers, which could cost the government votes in elections due by next May.

"Power has to be produced at an affordable price, fertiliser 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.

(Additional reporting by Matthias Williams and Malini Menon in NEW DELHI; Editing by John Chalmers and Muralikumar Anantharaman)