A great opportunity lost

Oil Sector Reforms; Instead of allowing the mar-ket to discover the price, government controlled it without realising its impact on reduced exploratio

During its first year, the NDA government missed a golden opportunity to implement the much desired oil sector reform. Oil and gas sector is undoubtedly a critical sector of the economy. It has a huge impact on India’s sustainable development, energy security and on the country’s desired policy to contribute to solving climate change problem.

Hopefully, even now it is not too late. International oil markets are relatively at a low level compared to the last four years. World benchmark Brent after staying above $100 per barrel during 2010-2013, fell below $50/b in the first quarter of 2015. That was the time when the NDA could have taken some hard decisions to reform the oil sector pricing.
It is to the credit of the NDA that it totally liberalised diesel price from October 18, 2014.

As in the case of petrol (liberalised from June, 2010), public sector oil companies now have the freedom to change it to reflect international oil market. As oil prices were falling, the NDA government boldly increased excise taxes to mop up additional revenues. One needs to admire the government for such bold steps. Unwisely, they had been reduced by the UPA when oil prices were high, purely for political reasons.

For several sound reasons, excise taxes on diesel and petrol are kept high in most countries. They serve to reduce green house gases (GHG), and contribute to improving the financial position of the government to balance the budget. Petrol and diesel prices touched a low in the past 12 months owing to fall in international crude price. But they firmed up later. Since such unpopular decisions are made by the oil companies without the interference of the government, there has not been the usual protest by the opposition. Let us hope that unlike the UPA, when oil prices go up in the future, the NDA will not be tempted to control petrol and diesel again to the detriment of the economy.

In December, 2014, the NDA announced a policy to scrap PDS kerosene to plug leakages and reduce corruption. It would have allowed kerosene to be sold at market prices. The poor would still be given subsidy through direct benefit transfer (DBT) to reduce diversion. It is a mystery why the government backed down to take a historic step of liberalising kerosene, a commodity controlled since the World War II. Also at one stroke, the NDA would have eliminated the mother of all corruption.

However, it is in the distribution of residential LPG where the NDA government has completely failed to take a much desired decision of removing subsidy and liberalising LPG to reduce diversion, and to reduce subsidy burden. Studies have shown that the 20 per cent of the rich get 39 per cent subsidy and 50 per cent middle class get 47 per cent of LPG subsidy. In 2013-14, LPG subsidy burden was Rs 52,246 crore.

Aware of this reality, the government had urged the well-to-do to voluntarily give up the subsidy. Only an insignificant number has so far done so. A bold policy of scrapping residential LPG would have showed the real desire of the NDA to reduce subsidy burden and to divert the resources generated for other sectors like education, health, water. The government can still continue to assist those below the poverty line through DBT to plug the leakages.

A baby step

In case of gas sector, the NDA government’s reform was at best a baby step. The gas formula suggested by the UPA was arbitrary, but it reflected the Indian market reality of LNG imports to meet the domestic demand. Criticising the UPA gas formula as generous, the NDA removed LNG prices and replaced them by unrelated Canadian and Russian gas prices. It looks as though the goal was only to reduce the resultant gas price.

Instead of allowing the market place to discover the price, government continued to control the price without realising how it will result in reduced exploration. At least one good thing they did was not to have multiple pricing or a postal stamp kind of pricing. The NDA also failed as a result of wrong gas pricing policy to promote shale gas exploration which has brought about dramatic changes in the US oil and gas sector, and is likely to do the same in China.

The Vijay Kelkar committee submitted a report in September, 2014, outlining several recommendations to reduce oil and gas import dependency. If implemented in totality, India’s oil and gas import dependency would be only 39 per cent versus the 77 per cent under the business as usual scenario in 2030 and the current 62 per cent. Such a reduction would be a stunning achievement.

So far, the NDA has showed little interest in the report which is unfortunate. The NDA government rejected the recommendation of not to accept model revenue sharing contract (MRSC) which would deter oil companies from investing in oil exploration. No country in the world has MRSC today.

If the NDA is serious in contributing to solve the climate change problem, which is on the world agenda, it should have eliminated fossil fuel subsidy to reduce GHGs. Can the Indian government at least take a baby step by reducing direct subsidies on kerosene, LPG, and natural gas? Indeed, the NDA government lost a golden opportunity in its first year by failing to reform the oil sector.