My comprehension is tested all the time. I thought the nuclear deal was about energy security and power stations, not achievements or disappointments of individuals. We are told that the Minimum Support Price (MSP) for wheat was suppressed last year so that farmers could earn more through private parties—and then, we imported wheat from (the same parties?) at higher prices, and subsidized the distribution. Wouldn’t it have been simpler to pay farmers a higher price ab initio? It was good to hear last month that the finance ministry was confident in managing capital flows, but now, after a deluge, the minister says that he is worried about the flows and that we have yet to learn how to manage them, though he adds that we will. Finally, after being told that international oil prices are on the rise, we learn that prices of LPG and kerosene will not be raised for three more years. I thought we had a commitment before Parliament for fiscal rectitude.
On the last, it was being speculated for some time that petrol and diesel prices would be raised. These are currently calibrated at a crude oil basket of $56 per barrel, while the import prices for India are around $75 per barrel and spot crude is around $85 per barrel. I had written earlier that we would see $100 a barrel before Christmas, and a possible doubling before 2010. Political considerations are obviously at the forefront of the decisions not to hike consumer prices, even though oil companies are reported to be losing Rs160 crore a day.
LPG and kerosene prices would have to be raised at least by Rs200 per cylinder and Rs6, respectively, to maintain the current level of subsidies. Next year will see a steep rise in wheat prices, given both global crop failures and the decision to raise the MSP at home. With this, other cereal prices would go up, too. If cooking gas and kerosene also go up, it would be politically untenable in a pre-election year. As foodgrain prices can’t be kept under control, domestic fuel prices would be capped.
There is some clever thinking here. Liquidity is a problem, and the Reserve Bank of India is having a hard time mopping up surpluses. Oil bonds, at more than Rs20,000 crore this time, will help suck liquidity, thus providing another monetary policy instrument. As their tenure is 15 years this time, the onus for paying up is on three governments down the line. Excise duties could be cut further, but as the revenues are needed to pay for the LPG and kerosene subsidies from the budget, these are retained—as an armour for use when oil prices go up even further. Oil producers ONGC and OIL are to bear a portion of the cross subsidy, thus reducing the exchequer’s burden. The announcement of ‘no increase in prices’, made sufficiently in advance of state elections, could be a handy talking point.
The strategy is clear, and attributable to considerations of the ‘political economy.’ But there could have been less costly interventions, had the key institutions delivered a little better.
First, ONGC has been falling behind in production. Not only has it lost several fields to open tendering in the new exploration licensing policy rounds, it is also unable to exploit the fields it has. It has not been successful in securing equity oil overseas, while the private sector has. The performance shortfall has pushed up imports, and hence, the costs of price adjustment. With global gas prices at around $10 per mBtu, even at the recently agreed prices for private sector gas at $4.20 per mBtu, the difference between market price and producer price is a direct subsidy to the end users—private industry. Over the next decade, this will touch Rs80,000 crore. Had the government agreed to higher, market-based prices, its profit (gas) would have been far greater. Now, the difference will go to private firms consuming the gas, not to the producers. And had ONGC been more efficient and capable, these discoveries could have been its. A lesson for the petroleum ministry to focus its energy on oil exploration and discovery, as the single most important objective.
Second, every country has gone into a conservation and alternative energy mode. Fuel consumption norms for transportation are statutory, and automobile manufacturers are looking at hybrids. Not here. There is absolute silence on fuel efficiency, particularly in the automobile industry. Perhaps it is time to set up an expert panel to prescribe industry–specific mandatory norms—sweetened, if required, by tariff concessions, R&D grants, etc.
Third, the search for alternative fuels has to be systematic. While the mandated 5% ethanol blending with petrol has more to do with helping the sugar industry than with saving fossil fuels, and will only make a small difference, incentives for biofuel are still in their infancy.
The issue is not of pricing alone —more seriously, it is of availability and proper use. We should get our agenda together immediately.
S. Narayan is a former finance secretary and economic adviser to the Prime Minister. We welcome your comments at firstname.lastname@example.org