Fuel price hike | Rs 3.9 cannot make up for Modi government’s gross energy mismanagement

On May 15, days after the Assembly poll results, the Union government allowed public sector oil marketing companies (OMCs) to raise retail prices of diesel and petrol by about Rs 3 per litre. Prime Minister Narendra Modi also did the formality of urging the people to reduce their consumption.

On May 19, 90 paise was hiked for both petrol and diesel, making it the second hike in five days’ time.

This price increase makes hardly any difference to the OMCs’ under-recoveries (which are about 10 times higher), exceeding Rs 1,000 crore a day. Fuel price rise becomes a big issue in India as the government has a monopoly (OMCs are merely an operational arm) of its distribution.

The government’s inability to reduce India’s choking dependence on crude oil imports and to secure its supply is the bigger policy failure. Why has India failed to reduce its dependence on crude oil and gas imports? Why is India not able to secure supplies? Will ad-hoc crisis measures solve the basic crisis?

Big energy policy mismanagement

Modi was fully aware of India’s Achilles Heel of petroleum import dependence (more than 70 per cent) in 2014, amidst falling domestic crude oil production. In 2015, he set a policy goal of reducing India’s import dependence to two-thirds by 2022 and to half by 2030.

However, setting policy goals is easier than achieving them. Today, India’s crude oil import dependence has gone up to 88 per cent, and it’s increasing every year.

Why did the Modi government fail?

Considering India’s resource situation (meagre oil and gas; abundant solar insolation), a massive transition to renewables (primarily solar) is the most obvious choice. Solar electricity is the cheapest, and its ‘fuel’ (sunlight) is free.

As Indian companies did not own solar technologies, the government had to choose between allowing companies from China (which have a monopoly over solar tech) to invest and produce in India or import the products (solar cells and modules) from China.

The Modi government made a huge mistake by virtually banning Chinese companies from investing and manufacturing solar power generation products (including electric vehicles and storage batteries) in India.

Consequently, India has been importing these products from China, paying a much higher price, resulting in a humongous trade deficit with China. In addition, the policy has constrained the scale of our energy transition programme.

The government’s failure to adopt and execute ambitious and faster renewable energy transition policies and programmes is singularly responsible for our deteriorating import dependence on petroleum products — a dependence which will increase further.

Inability to do business with Nepal and Pakistan

Nepal and Pakistan hold the keys to energy supply security. Nepal has enormous hydro potential, much more than Bhutan, where India has successfully built a mutually beneficial programme. A deal with Nepal on hydro-energy production and purchase would have massively contributed to India’s energy security.

There is a widespread feeling that India botched this up by not lining up investment in building hydro-generation at fair terms, and allowing Nepal to earn reasonable profits (including by selling power to Bangladesh). This has resulted in Nepal’s hydro potential going to waste. It has not only hurt Nepal, but also India.

Geographically, Pakistan sits between the gas and crude production hubs of West Asia and Central Asia, and India. Gas pipelines from Turkmenistan and Iran/Qatar, which have been under discussion for decades, would have helped India avoid the stress caused by the blockade of the Strait of Hormuz.

India must decide whether it wants to do business with Pakistan, or demonise it. The Modi government chose to choke Pakistan by suspending the Indus Water Treaty. Under such circumstances, the trade of oil and gas through pipelines is unimaginable. A hostile policy towards Pakistan can be reasoned from a military point of view, and it might be politically advantageous for the ruling party, but it is a costly one from an energy security perspective.

Ad-hoc measures

The reduction of excise duties (Rs 10 per litre on petrol and diesel in April) hits fiscal soundness (will cost about Rs 1.6 trillion in a year). Accumulation of losses by the OMCs (of about Rs 3 trillion in a year if crude prices remain at the current levels and there is no further increase in retail prices) will come to the government (as the OMCs may have to be supported with a budget subsidy).

These ad-hoc measures will not solve the energy crisis; they will, instead, cripple government finances.

The government has allowed the OMCs to raise the prices of petroleum products for the commercial sector. This has resulted in the wholesale price index shooting up by more than 8 per cent in April. This will soon have its second-order effects in the form of generalised inflation for retail consumers. As and when the government allows the OMCs to raise retail prices (in instalments), the consumer price index will also start shooting up.

Inflation is the worst tax and affects the poor most viciously. This will have political consequences as well. The government will have to analyse the real reasons dispassionately and muster the courage to take politically hard decisions. If it does so, it can lay the foundation for building and securing India’s energy security. That, however, will take years to fully materialise.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)