Energy crunch may hit economic growth

Energy crunch may hit economic growth

Coal, along with oil and gas, constitutes 95% of the energy basket; despite the advent of hydro and nuclear energy, the energy mix is not expected to materially change in the coming decade.

The development of domestic energy sources is interlinked with the development of the domestic natural resources industry. This will also provide much-needed investment and jobs, and fuel industrial growth. Rapidly increasing imports of crude, natural gas and coal risk making India’s growth hostage to international supply and price volatilities. Development of domestic resources is critical for India to maintain a compound annual growth rate of 8%.

Present per capita consumption of energy in India is among the lowest in the world, yet the country is battling acute electricity shortages. Published statistics reveal that India has an energy shortage of 6.6%, with the peak-hour deficit rising up to 11.4%.

The demand for the primary sources of energy such as coal, oil, natural gas and electricity largely outstrips the present installed production capacities. Worse still, India is not expected to commission any major increase in the production capacities of any of the primary sources of energy. Growing expectations for natural gas production rates from the KG basin discoveries were dampened by recent disappointments in production profiles.

Development of domestic natural resources requires investments, both by private and state-owned entities, and comprising equity and debt funding. Investments, in turn, require a supportive policy and stable regulatory framework. Judicial decisions in respect to natural resources have clearly stated that the government has a fiduciary responsibility as such resources belong to the nation. Therefore, a transparent and efficient mechanism for allocation of natural resources is required, along with legislative reforms for the coal sector. The legacy framework is not scalable or robust for the dynamics of the prevailing economic environment. The establishment of independent regulators for a market-based economy is important along with stability in the tax and royalty rates.

In the mid 1990s, the government announced the New Exploration Licensing Policy (Nelp) for oil and gas acreage, which met with initial success as it attracted more than $15 billion in exploration capital, resulting in at least 80 discoveries. The framework of Nelp, too, has been affected by controversies on cost recoveries and profit sharing. Possibly, the time has come to migrate to the model used in mature economies of a royalty tax regime instead of the prevailing production sharing system. This could eliminate the concerns and risks involved in complex cost recovery and profit sharing mechanics. So the policy design for developing resource assets needs urgent and innovative attention. The wider challenges of land acquisition, environment clearances and enabling infrastructure and linkage needs make investors wary while evaluating investment opportunities.

Unlocking the potential can create world-scale natural resource projects in India, attracting and absorbing both foreign and domestic capital, creating skilled and unskilled jobs, and providing the much-needed energy supply and security of supply for India. India is endowed with significant natural resources, possesses the capital—both financial and human—and has a material market to absorb the production. All that is needed is the framework that will connect and enable these factors in an effective, efficient and timely manner. Hopefully, the Budget 2012 will provide the impetus.

Gokul Chaudhri is a partner at BMR Advisors.

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