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Integrated energy policy gains urgency

Key components should include duty reliefs

THE petroleum sector is proving to be the Achilles heel of the Indian economy, with the mounting burden of subsidies on select petro products. The Planning Commission has called for a mechanism that will help formulate appropriate pricing decisions equitable for all stakeholders.

It has, in fact, been emphasised that there should be a regulatory body for the oil industry and the ad valorem duties on various products adjusted in such a way that they are revenue neutral. The Ministry of petroleum and Natural Gas has also represented to the Finance Ministry for a reduction in excise duties on petro products subject to price control with a view to avoiding undue hardship to consumers.

Mounting subsidies

The cost of subsidy in 2006-07 is placed around Rs.74,000 crore against Rs.46,874 crore in 2005-06 and oil bonds carrying a coupon rate of 7.5-8.0 per cent will have to be issued for Rs.28,300 crore to ensure reasonable profitability for the public sector oil companies. Even with the issue of bonds for Rs.11,500 crore, working results of all oil refining companies in 2005-06 have been disappointing and dividend payments have had to be slashed in almost all cases.

The world prices for crude were hovering ruling around $70 a barrel until recently and only latterly a slight softening trend has been noticeable. The average price in the current financial year may, nevertheless, be higher by at least 25 per cent as compared to 2005-06.

It is therefore a matter for serious concern that the outgo in respect of forex resources on oil imports will be $52 billion against $43.84 billion in 2005-06 on the basis of the data provided by the Directorate General of Commercial Intelligence and Statistics (DGCIS).

The rupee cost of these imports also will be higher more than proportionately, as the Indian currency has been weakening against the U.S. dollar and other major currencies latterly.

As crude imports are expected to rise steadily by over 10 million tonnes annually because of a slow rise in domestic output of crude and natural gas, the need for an effective integrated energy policy is strongly felt in government circles.

As part of the initiative in this regard, mega coal-based power projects are planned in areas advantageously placed for coal supplies.

The commissioning of the 3,000 MW Talcher thermal plant in Orissa will enable the State to export surplus power to neighbouring regions.

Another thermal plant of 4,000 MW capacity is planned in the same State which is being projected as the future powerhouse of India.

While similar mega projects will come up in Maharashtra, Andhra Pradesh and elsewhere, it has been pointed out that pricing of coal should be rational and Coal India and others should not be allowed to exploit their monopoly status.

Meanwhile, coal gasification is to be attempted in a big way with many companies in the private sector keen on executing schemes in West Bengal, Madhya Pradesh and other areas having large coal reserves.

With a view to reducing dependence on expensive fossil fuels, plans are afoot to step up hydel generation through exploitation of the potential in Himachal Pradesh, Uttaranchal and the eastern region.

Arrangements are also under way with the governments of Nepal and Bhutan to explore the scope for multipurpose hydel projects. These projects, apart from ensuring huge supplies of cheap power, will help minimise damage from recurring floods in rivers having their catchments in these neighbouring countries.

The nuclear agreement with the U.S., which is likely to take a final shape in the coming weeks, may also be useful in reducing acute dependence on oil and gas for power generation and other purposes.

All these measures, however, will yield tangible results over a decade and the immediate objective should be to prune imports with intensive exploration and exploitation of the domestic potential and proved reserves in different regions.

Some benefit may be derived from the newly discovered onshore and offshore sources from 2007-08 onwards.

The use of ethanol as an admixture in gasoline should help displace at least 2 million tonnes of crude annually. In Brazil, the ratio of ethanol in car fuel is as high as 40 per cent. Increased supplies of coal gas also may be yielding similar results.

The deficiency in petro products from indigenous sources will thus have to be overcome by multi-pronged measures.

High tax content

This is why the Planning Commission has suggested periodic changes in ad valorem duties as also specific duties wherever the changes can be revenue neutral.

The States too should not be averse to adjusting sales tax rates as was done recently by Tamil Nadu and many Congress ruled States. While such reliefs may moderate the extent of increase in basic prices for petro products, it is equally important to prevent an enlargement of the trade gap arising out of burgeoning oil imports.

The current account deficit for 2006-07 may be higher at $13 billion against $10.61 billion, in spite of an impressive rise in exports, which may fetch additionally $26 billion in a whole year. However, with costlier oil imports and continuing non-oil imports, the trade deficit may be sizable at even $65 billion against $51.55 billion in 2005-06.

With a further rise in net invisible receipts and favourable trends in production of crude and natural gas in the coming years, the current account deficit may tend to contract, pending further strengthening of the Balance of Payments position.

The objective is to obviate a net outflow out of owned forex reserves due to the deficit on current account. If success can be achieved on this front, full convertibility of the rupee will become feasible. Then, the problem will relate to the containment of inflationary pressures arising out of rising rupee cost of petro products and the effective implementation of a well conceived Integrated Energy Policy.

P. A. SESHAN

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