A long-term strategy to reduce crude imports
This will bode well for energy security and make our financial markets less volatile in the event of untoward developments in the oil market
The oil industry has been witnessing significant turmoil and uncertainty in recent months. The primary benchmark for international oil prices, the Brent crude, reached a level ($80.49 per barrel) in May that was not seen since 2014. Histrionics around the US sanctions on Iran have also affected sentiments considerably. In recent weeks, tariffs imposed by the Donald Trump administration and the increasing production from Saudi Arabia and Libya have caused abatement of prices. However, with the global economy in a better position now than in the last few years and the oil supply glut disappearing, crude price might not fall sharply over the near term, as it did before. High oil prices is a double whammy for India: it would not only widen the country’s trade deficit but also impose a fiscal burden on account of fertilizer, kerosene and LPG subsidies.
With domestic retail prices of transportation fuels at an all-time high, the expectation is that the excise duty on petroleum products might be lowered unless the recent fall in prices sustain. The government had collected around ₹2 trillion from such duties in 2017-18, which played a crucial role in fiscal management. So, lowering the excise duty would exert pressure on fiscal balance. Alternatively, oil marketing companies (OMCs) may be asked to absorb losses but that would intrude on their capital expenditure plan. That would also send rather negative signals to markets, which have been watching out for any government moves on price control and passing over subsidy burdens to oil producing and marketing companies, and, in effect, rolling back pricing reforms that are of relatively recent vintage.
What India needs now is a carefully devised strategy that is not driven by short-termism, but aims to gradually insulate the country from global oil price volatility. Such a strategy should be centered on three things: expediting the migration to electric mobility, expanding the biofuel blending in petrol, and stimulating exports.
Since the transport sector accounts for around 70% of the total diesel sales in the country, it is an appropriate sphere for a transition from traditional fuels to electric motors. A favourable incentive mechanism (subsidy up to 60% of the total cost of an electric bus) to help the adoption of electric buses gain traction is already in place.
So, what we now need to do is to get the pace of building electric vehicle (EV) supportive infrastructure to catch up with the addition of new electric buses to the public transportation system, mainly to facilitate a smooth take-off of EV bus services. The best approach thus is a multi-stage adoption. This calls for first identifying a specific set of routes for electric bus services in a particular big city and ensuring that all infrastructure needed for their seamless operation is in place before considering other sets of routes.
Within the transport sector, trucks alone account for around 28% of the diesel consumption. Thus, creating dedicated electric corridors for trucks on the highways could go a long way in curbing oil imports.
Increasing the blending proportion of domestically available biofuels in cooking gas and transportation fuel is another way to reduce India’s reliance on imported crude oil. As is known, ethanol is mainly used for blending in our country. That ethanol is mostly derived from sugarcane molasses means its production is contingent on weather patterns. Moreover, sugarcane, refining of which creates molasses, is a water-intensive crop, so fresh incentives to increase ethanol production may not be good economics in a country where water scarcity is a serious problem.
Hence, methanol, produced from coal, should be given more weightage when it comes to blending. Besides, biodiesel supply should be augmented by making jatropha farming more productive through genetic modification. If all these fuels together reduce oil imports by 20%, the country could save up to $18 billion a year in terms of foreign exchange (assuming oil prices stay around their current level).
In the near- to medium-term, it is imperative to explore how fuels can eventually be covered under the goods and services tax (GST), which is essential not only to reduce any undue burden on users but also to prevent leakages and achieve efficiency.
To begin with, natural gas and aviation turbine fuels (ATFs) may be considered for inclusion, which might not cause substantial revenue loss for states but will foster confidence that other petroleum products will be brought under GST sooner rather than later.
The government has done well to not have resorted to administrative price controls, which would be at variance with the reform credibility that it earned through the implementation of structural reforms such as GST and the new insolvency and bankruptcy code. Further affirmation from the highest levels of the government on continuation of fuel price deregulation would go a long way in bolstering investor sentiment, which is essential to boost private investment.
In brief, the right option now is to use the current situation as an opportunity to push for initiatives that are in the best interest of the country. Reducing the country’s reliance on oil imports would bode well for energy security, and make our financial markets less volatile in the event of untoward developments in the oil market. And savings from reduced oil imports could in turn be used to finance infrastructure projects, which are crucial for India’s long-term growth prospects.
Akhil Bansal is deputy CEO at KPMG in India.
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