Go easy on the oil

http://www.asianage.com/columnists/go-easy-oil-545

Jul 16, 2014

Mohan Guruswamy

The oil sector is a goose that lays a golden egg for the economy. We need a policy that will on one hand curb the appetite for oil consumption, and on the other hand will encourage domestic production.

The biggest millstone around India’s neck is its ever-increasing trade deficit. India had a trade deficit of $191 billion in 2013. Of this $109 billion was due to oil. India imports 82 per cent of its oil needs. Last month the price of the Indian basket of imported oil peaked to $114 a barrel when it was assumed that it would be $104.

Every additional dollar adds $1 billion to the oil bill. India is the world’s fourth largest consumer of energy with an oil equivalent of 563.5 million tonnes of oil a year. Its oil demand is growing by 5.1 per cent every year. Clearly there is an urgency to produce more oil and gas domestically. The road to our national salvation means closing in this trade deficit, which means reducing our energy import dependency quite significantly. I would have liked to see a tax holiday for 10 years for oil exploration and production, as was given for the power sector. But then, Gautam Adani and Anil Ambani are not in the oil sector.
There are plenty of oil and gas reserves in and around India. We have to make those fields viable by higher producer prices. There is an essential paradox we must understand here. The higher the prices the greater the reserves, as it make more reserves commercially feasible. The appetite for energy is always going to be huge in a growing economy. And if the government keeps subsidising consumption to the extent it does, that appetite will only keep growing. Last year the government subsidised oil consumption (under-recoveries of petroleum marketing public sector undertakings) to the extent of Rs 190,000 crore or over $30 billion at today’s exchange rates. Fertiliser subsidies and electricity subsidies further ramp up the subsidy bill.

Clearly getting an energy policy that does not drain national resources and drive the national exchequer into near bankruptcy is a national priority. We must also understand that subsidies are always at the cost of the poorest and the voiceless majority of this country. Every rupee given to a liquefied petroleum gas (LPG) consumer is at the cost of a poor villager who gets nothing from the state. Since 85 per cent of the LPG is consumed in urban areas and mostly by the middle and upper classes, by no stretch of the imagination can it be called a merited or deserved subsidy. This is not like state provided free education, which is obviously a merited and well-deserved subsidy.

All petroleum products consumed in India are heavily subsidised by the state. Most of it is quite misdirected. Take fertilised subsidy, for instance. Last year it amounted to Rs 73,000 crore. Over 60 per cent of India’s arable land is rainfed. The vast majority of farmers (88 per cent) are either small or marginal farmers with an average holding size of 0.63 hectare. Most of them do not use chemical fertilisers or the usage is marginal. Fertilisers are mostly used by middle and large farmers with full irrigation, either from canals or tubewells. To compound this further, the bulk of foodgrains procurement with ever increasing minimum support prices is from three regions — Punjab, Haryana and the delta districts of Andhra Pradesh. Then there is the aspect of “gold-plating” of fertiliser plants so that manufacturers can benefit more from the subsidy. Is it any wonder then that India has the highest fertiliser production prices in the world? So whom does the fertiliser subsidy mostly benefit?
The oil sector contributes about $56 billion or Rs 3.6 lakh crore by way of exports of petrol and HSD (high speed diesel). Oil products are our biggest single export item. This is quite ironical for an economy where it is the biggest import item. Besides, it also is a huge contributor of revenues. The sector is a key revenue earner for the central and state governments. In 2012, it contributed Rs 23,279 crore to Central and state governments in taxes, accounting for 20.6 per cent of total indirect taxes. In addition, domestic supplies contributed over Rs 54,000 crore by way of royalties.

Clearly the oil sector, despite oil imports being a millstone around our economy, is also a goose that lays golden eggs for the economy. That it needs to be nurtured cannot but be overemphasised. It is apparent that our economic salvation lies in having a clear headed and comprehensive policy for the sector. We need a policy that will on one hand curb the appetite for oil consumption, and on the other hand will encourage domestic production.
Unfortunately, Budget 2014 does neither. It talks vaguely about reviewing the subsidy regime later. When a TV journalist asked why he didn’t do it now, finance minister Arun Jaitley said that he was afraid that the Trinamul Congress and the Leftists would have entered the Well of the House and disrupted the proceedings. Clearly we need a bold and imaginative government policy on this, rather than one that runs scared of a few disruptions. When he assumed office, Narendra Modi said that the condition of the economy and the direction it was taking would need some bitter medicine — kadwi dawa. Far from it, Mr Jaitley seemed more intent on sweetening the mouths of Mamata Banerjee and Sitaram Yechury!

The writer has held senior positions in government and industry, and is a policy analyst studying economic and security issues. He also specialises in the Chinese economy.