Getting down to the energy business


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This may be the right political moment to resolve the dilemmas surrounding the energy policy.

Energy sits at the nub of every politician’s deepest dilemma. How to meet the demands of the electorate for affordable and reliable fuel without pushing government finances into a deep hole? In the specific context of India, this dilemma has been about providing cheap (if not free) power to farmers, subsidised LPG and kerosene to householders and affordable diesel to transporters and, at the same time, keeping a check on government finances. So far, politicians have done a poor job in striking the right balance. They have concentrated only on meeting populist demands. As a result, the energy sector is in crisis and the exchequer faces a high fiscal deficit.

The most experienced brains in the country have sought to resolve this dilemma over the past few years. Vijay Kelkar (former petroleum and finance secretary), C. Rangarajan (former governor of the RBI), B.K. Chaturvedi (former petroleum secretary, cabinet secretary and member, energy, Planning Commission) and Kirit Parikh (energy economist and also former member, energy, Planning Commission) have, at some point or the other, headed a committee of experts to look into this issue. The terms of reference for these committees have been different but their underlying purpose has been to lay down a route map for the government to meet the legitimate and understandable demands of the poor while also complying with the macro demands of financial prudence. Had previous governments implemented even part of the suggestions recommended by these committees, the current administration would not have inherited such a mess. Unfortunately, they did not or could not, because they had a fractured and unstable mandate.

Today, the political conditions are different. The government is not shackled by coalition politics, the next election is five years away and the prime minister has been elected to put the economy back on the rails of sustainable growth. There could not be a more propitious combination of circumstances to correct the imbalance. I list six initiatives below that I believe will help the government move in that direction.

One, energy prices should be market-oriented and energy subsidies should be scaled back. It would be socially and economically harsh to withdraw them totally. The poor cannot afford the current market prices, especially for LPG and kerosene. The structure of disbursement should, however, be altered. Currently, the PSUs make the initial payout. The government subsequently reimburses them, but the lag imposes an interest burden on their bottom line. Subsidies should henceforth be paid out of the Consolidated Fund of India. They should be disbursed through direct cash transfers, using the platform of Aadhaar, and the distributor intermediaries should be totally excised from the process.

Two, the government should continue the current system of graduated increase in diesel prices, by 50 paise per month, until such time as the domestic price is aligned to the market. In addition, it should contemplate raising the price of the higher grade BS1V to import parity levels as soon as practically possible. This is the grade consumed inter alia by owners of SUVs and sedans. There will, no doubt, be leakages and diversions. It is never easy to manage a dual-price regime, but the benefits should outweigh the costs. It is estimated that this initiative could save the exchequer upto Rs 10,000 crore. The supply of subsidised diesel for fuelling generator sets and telecom towers should also be choked off.

Three, the government should reinstate the decision to cap the supply of LPG cylinders to six a year. This measure was implemented but then rescinded as the elections drew near.

Four, the Rangarajan committee recommendation to hike the price of domestic gas to $8 per million metric British thermal units should be endorsed. This is, however, a controversial subject and it would be counterproductive to do something that provokes another AAP-type outburst. So the government should place the incremental revenues earned by the Reliance/ BP consortium into an escrow account. It should be kept there until the arbitration proceedings that this consortium has initiated against the government have been completed. If the arbitral tribunal accepts the consortium’s contention that the government has a contractual obligation to raise prices, the money can be released to them. If not, it can be handed over to the government. The positive effect of such an endorsement would be twofold. One, ONGC, which produces 85 per cent of India’s gas production, would see substantially enhanced earnings. Two, international industry would see this as a positive signal. The government should certainly not set up another committee to look into this matter.

Five, the government should permit private-sector participation in coal mining. Further, state governments should be encouraged to streamline and expedite land acquisition and approval procedures. Also, the many projects that are currently stranded because of delays should be quickly unclogged.

And finally, the government should take a leaf out of the experiences of Gujarat and Madhya Pradesh with the management of state electricity boards (SEBs). Both state governments have successfully turned around their SEBs. They were able to do so because they gave the market fuller rein and persuaded the public to accept some short-term pain in return for assurances of robust and durable longer-term gains. Gujarat, for instance, segregated its main rural transmission line into two feeder lines. One feeder provided power for irrigation; the other, for lighting and cooking. The price of the former was subsidised, the price of the latter aligned  to the market. The farmers accepted the quid of higher price for (controllable) household consumption in return for the quo of reliable, timely and cheap supplies for farming. Today, the Gujarat electricity board is a profitable entity.

In addition to these six specific initiatives, the government should communicate, in non-technical language, the interplay between energy prices, government finance, economic development and environmental protection. It should bring consumers into the energy debate and harness the “soft power” of public opinion to get politicians to do what is right and not just what is perceived to be popular. The prime minister is a masterful orator and his communication skills are difficult to best. He also has a deep understanding of the energy business, perhaps more so than anyone else in his cabinet. Were he to take on the task of explaining the issues and dilemmas surrounding an energy policy, the political dilemmas outlined above would be easier to resolve.

This article first appeared in the Indian Express on June 1, 2014.