jun 19, 2012. Many of the analysis on India’s energy sector begin with the lament that India is not well endowed in energy resources. This is largely true. 73 percent of India’s commercial energy basket consists of fossil fuels but India has only 7 percent of the global coal reserves, 0.7 percent of oil reserves and 0.8 percent of gas reserves. But these figures do not necessarily convey the reality of resource availability. As the world is well endowed with coal reserves, India with 7 percent of the reserves ranks fifth in the world in terms of reserves. If exploited efficiently it is more than sufficient to meet India’s current demand at least as far as the power sector is concerned. However, we are all told that we are facing fuel ’scarcities’ and energy ’shortages’ and so we must import more of these resources. Even though India’s hydrocarbon resource endowments are far lower than that of coal, the available resources are poorly developed and utilized. Take the case of natural gas. India may not have resources to the extent anticipated about a decade ago but even the available resources are not being produced and utilized to the extent possible. As in the case of coal, there is a cry of shortage which is expected to be met through imports. What are we importing in reality? Are we only importing natural resources which are scarce or are we also importing better energy governance which is more scarce?
Despite several technological advancements India’s coal mining efficiency is only about an eighth of that in Australia. This is probably because India prefers to substitute labour for technology rather than the other way around. This may make commercial sense in the short term but in reality this represents a huge loss of economic and social welfare for the country. In the 16th and 17th centuries, India could not adopt the Spinning Jenny because replacing extremely low cost human labour with a Spinning Jenny would have resulted in negative return on capital for the investor. On the other hand, replacing educated and skilled labour with a machine multiplied returns for Britain. India’s low cost labour multiplied while its wealth declined. Britain’s labour population declined but it became wealthy and skilled. The rest, as they say, is history. India’s coal sector today is almost exactly where India’s textile sector was more than 200 years ago. In the name of protecting labour we are postponing the reform of the sector and trapping the mining labour in poverty for generations apart from ensuring that there is never enough coal available domestically for power generation. As an economist pointed out once, if subsistence employment of labour is all we want, we should just replace the miners’ shovels with spoons. More people will be employed and we will have an equitable distribution of abject poverty. Poverty is not the reason for poor governance of the sector, it is an excuse and cover for it. The rents that accrue to a small number of beneficiaries under status quo is valued more by decision makers than the more distributed national welfare that reform will bring.
In the case of natural gas, which is less dependent on labour but more dependent on capital and technology, we penalize producers of natural gas with onerous restrictions on pricing and market access that they do not produce as much as they would if circumstances were different. The Government, despite being corrupt and inefficient, does not want to be seen as favouring the private sector and therefore forgoes higher earnings in terms of royalty, taxes, jobs and profit share that it may benefit from if gas producers are given greater freedom.In the case of both coal and natural gas, the result is that we import more fuel. What we are importing in reality is better energy governance which is the root of our so called ’shortages’. Smaller countries such as Indonesia and South Africa which are less well endowed with coal but with relatively better governed coal sectors reap the benefit of India’s poor governance by exporting ever increasing quantities of coal to India. More perverse is the case of natural gas where rich countries such as Australia, Qatar and even the United States benefit from India’s governance shortfall.
The case of oil which accounts for over 80 percent of our energy import bill is even more bizarre. As the price differential between Diesel and Petrol has increased to roughly ’ 20 after the so-called deregulation of petrol prices, the demand for diesel has shot up while the demand for petrol has barely budged. In order to meet the growing demand for diesel, India which has a surplus refining capacity of 65 Million Tonnes imports diesel or buys diesel from export oriented private refineries at international prices (see news item in this issue).
These imports which are essentially a result of our poor governance are not cheap. As pointed out by a recent paper by the Prayas Energy Group, India’s energy imports as a share of GDP at 7.3 percent (in 2008) is higher than that of Germany at 3.3 percent and Japan at 4.4 percent despite the fact their energy import dependence is far higher than that of India at 75 percent and 95 percent respectively compared to India’s 33 percent. India runs a trade deficit while both Germany and Japan run trade surpluses. India’s net energy imports account for 60 percent of India’s trade deficit and gross energy imports account for one third of India’s import bill. Governance shortfall is expensive and unaffordable. It is time we stop fooling ourselves with narratives on resource or fuel scarcity and start exposing the truth.