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ANALYSIS
 
Vol. IX Issue. 37
Energy in the Budget

Lydia Powell,
26 February 2013

It is not clear how the reading out of mundane details such as the levying of service tax on air conditioned restaurants that do not serve liquor became a televised spectator sport in India but now that it has become one, a weekly column on energy cannot relieve itself from the responsibility of commenting on it.

As far as energy is concerned, the most important statement in the budget speech was the acknowledgement that energy imports are the main reason why India's current account deficit is so high. Though the Finance Minister restricted himself to commenting that FDI becomes a compulsion rather than a choice in this context, doing everything possible to contain energy imports is an important issue as it concerns the economic security of India. While the room for manoeuvre in curbing oil imports is relatively limited, thermal coal imports can and must be curbed.

Oil alone accounts for close to 55 percent of our trade deficit and coal another 8-9 percent. Even in the case of oil, even small increases in domestic production can make a significant difference to terms of trade and consequently contribute to GDP and in addition generate employment. As pointed out by Deepak Mahurkar of Pricewaterhouse,1 if domestic oil production can be increased to meet 40 percent of consumption rather than 30 percent, the gross value addition to the economy would be equivalent to over 1.2 percent of our GDP. If domestic production increases to 50 percent the gross value added is over 2.3 percent of GDP and if domestic production increases to 70 percent gross value addition increases by over 3.8 percent.

As repeatedly pointed out in this publication, coal imports are not unavoidable as it is in the case of oil. Coal imports are merely a quick-fix solution to the larger problem of increasing domestic coal production by implementing radical reforms in the domestic coal sector. In the long run reducing the demand for oil and coal without compromising on growth prospects is the best strategy to contain imports. Even a 1 percent increase in coal use efficiency can reduce coal use by 100 million tonnes. Implementing polices on this will take more than just a budget.

The other budget statement that is significant in the context of oil & gas is the potential shift from profit sharing to revenue sharing exploration and production contracts. The industry is unlikely to be pleased with this development. Exploration for oil & gas especially in deep and difficult waters is a high risk business and so private investors would have preferred to retain the model of profit sharing after full cost recovery. However the existing model opens up the possibility of gold plating costs which can take away legitimate revenue from the Government. In an environment where public trust in both the private sector and the Government is at historic lows, the Government decision to cover itself is understandable.

The trade off between rewarding risk and maximising revenue is not unique to the Indian context as investors and Governments all over the world want to maximise revenue for themselves and minimise risk by shifting as much risk as possible on the other party. What makes the Indian context different is that there is serious trust deficit between the public and private investors. Most people take collusion between Government and private sector as given. There is a need for both the Government and the private sector to invest in gaining public trust and also make small sacrifices in contractual terms that can greatly benefit the other party and in the end benefit the nation and it citizens. The statement that the uncertainty regarding the price of natural gas will be removed is positive but not unexpected. The possibility of a policy to encourage exploration and production of shale gas is something that seems natural but the question is if we are still unsure on how to 'encourage' exploration and production of conventional gas, will venturing into unconventional areas yield anything?

The provision of low interest financing from the National Clean Energy Fund through IREDA to renewable energy projects and the reintroduction of generation based incentives for wind with the provision of ' 800 crore cannot be contested. New industries and new sources of energy need an extra push. As per the 12th Plan (draft) renewables which currently account for 6 percent of generation currently (more on this later!) will increase their share to 16 percent by 2030 which is more than the share of nuclear power which is said to account for only 12 percent of generation by 2030. In this context the provision of ' 5880 crores which is said to be a 'substantial increase' over the previous period 'despite severe constraints' is surprising. Where is all the money going to go if nuclear energy is not going to make a significant difference to our energy needs?

Questions on energy access and energy poverty which have been elaborated in both the 12th Plan (draft) and the Economic Survey did not find a place in the budget speech. The 12th Plan concedes that the so-called 'electrified' villages are yet to be 'energised' which means electricity is unavailable to most people. There is nothing unusual or surprising about it as one does not have to be in a village to experience not being 'energised.'

If we stick to the analogy of the 'budget' as spectator sport, the energy budget did not really entertain or excite but it did not bowl any fouls or kick any self-goals.

Notes:

1At 11th Petro India organised by the Observer Research Foundation and India Energy Forum in December 2012

Views are those of the author

Author can be contacted at lydia@orfonline.org

      
 
 
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