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Chronicle of an emergency foretold

The annual budget of any government is in some sense like a performance by the proverbial Indian juggler. It is not merely an exercise in ba...

Written by R K Pachauri |
February 24, 2003

The annual budget of any government is in some sense like a performance by the proverbial Indian juggler. It is not merely an exercise in balancing the annual revenue and expenditure of the government, but also a major effort in stimulating economic growth and development and maximising the country’s human welfare. Even more important, however, is the significance of the budget in highlighting and signalling policy directions that look beyond the year for which the budget is formulated. Within these objectives, the budget of the Government of India this year has also to contend with the reality of state elections scheduled this year and the parliamentary elections due in 2004.

It would be interesting to see how liberalisation is built into the coming budget, given that rapid efforts at opening up the Indian economy and pursuing a vigorous plan of disinvestment would have political repercussions. Yet, the creation of a bullish business climate and an upward trend in economic growth over the next eighteen months would actually provide the NDA Government with a political advantage. The budget must, therefore, take full advantage of the global flow of investments.

There are two major sets of global developments that should also guide the thrust and content of the annual budget. The first relates to the World Summit on Sustainable Development (WSSD) held in Johannesburg, which came up with certain global targets and priorities, which India not only has to be seen as a part of, but should actually provide leadership to as a major developing country. The second set of global developments arises out of the situation in the Middle East, the threat of war in Iraq and the political turmoil in Venezuela, which have had a major impact on global oil prices. The fact that India has to be concerned about global oil market developments also highlights the need for an integrated long-term energy strategy for the country, which unfortunately has not even been enunciated, and therefore not implemented despite three decades having gone by since the first oil price shock of 1973-74.

First, let us deal with the WSSD. There is much in the Johannesburg agreements that are in accord with our own priorities and critical challenges. For instance, Johannesburg agreed that by 2015 all children should be able to complete a full course of primary schooling. It also targeted a reduction in mortality rates for infants and children under 5 by two-thirds and maternal mortality rates by three-quarters by the year 2015. Similarly, it was agreed that by 2015, the proportion of people without access to safedrinking water should be halved.

The year 2015 is not far away. If our Government does not wish to have this country remain a sad aberration on the global scene, we have to take action. What can India do to provide substance to the decisions taken at the WSSD? Perhaps the best course of action would be to live up to Gandhi’s advice: ‘‘Be the change you want to see in the world’’. This means that the budget must provide a powerful signal reaffirming the Government’s commitment to goals that the world has accepted as important to the principles of sustainable development.

Now, on the issue of energy security, recent developments in West Asia have only brought to the surface an uneasy truth that has remained hidden in the maze of short-term expediency in the energy sector. The reality of energy sector developments in India for several years now has been the existence of a fragmented approach.

Responding to a heightened perception of threat to energy security, the Government has, of course, pursued, investments in the Sakhalin oil field in Russia and oil reserves in Sudan, but the increase in demand for imported oil provides reason for concern. Energy security does not increase only through actions in the hydrocarbons sector. Much of our dependence on oil consumption and, therefore, on oil imports grows out of failures in supply of electric power for instance and the lack of adequate technological development in large-scale use of clean coal technologies. To what extent is the Government prepared to pursue a vigorous agenda with the states in restructuring the electricity supply industry? Can the budget restore the momentum through fiscal incentives and a more proactive role by the Finance Ministry, to resurrect the efforts of Suresh Prabhu when he was the Power Minister? Similarly, can the budget provide a combination of incentives and disincentives for metering of electricity supplies to the agricultural sector and pricing based on the quantity consumed?

A state of apathy seems to be in evidence as far as the electricity sector is concerned. Unless this is addressed effectively, GDP growth will suffer and there would be no improvements in the coal supply industry either. Similarly, given that the major consumer of natural gas in the country would be the power sector, there is little incentive for its exploration and production.

The country’s energy security naturally has to be seen both in a short-term context and in terms of a long-term strategy. In the immediate short-term, the oil companies and the Ministry of Petroleum and Natural Gas are concerned over coping with threats to uninterrupted and adequate supply of petroleum products in the event of a war in Iraq. Oil prices have already reached levels above $30 a barrel, and while OPEC’s recent decision to increase production by about 1.5 million barrels a day would help in stabilisation of the oil market — unless there are prolonged hostilities in the Middle East — it would then have to be seen how OPEC reviews the situation and takes further decisions when it is due to meet on March 11.

India’s immediate concern is to ensure that it has enough stockpiles of petroleum products that would ensure continuity of supply. Given the fact that the Government’s Hydrocarbon Vision projects a demand at 276 million tonnes of oil equivalent of crude oil in the year 2025, the need for a strategic petroleum reserve (SPR) would become even more important in the future. The US, for instance, maintains an SPR of almost 700 million barrels at any point of time, which is essentially under some form of control by the US administration. The biggest danger of destabilisation of the global oil market for India is not so much in the nature of a physical disruption in supply, but essentially in the nature of an economic threat. An increase in oil prices, which, if maintained for anything beyond 10-12 weeks, would have a major inflationary impact on the Indian economy, and other adverse macroeconomic effects due to a substantial increase in foreign exchange outflows. In the short run, therefore, the Government would have very limited options to cushion the economy against an economic shock, which only lends further relevance to the need for an enlightened long-term energy strategy.

There are several elements that would define such a strategy. First, we need to enhance the supply of natural gas to India from neighbouring countries such as Iran, Bangladesh, Myanmar and possibly even Turkmenistan provided a proper route can be established through Afghanistan and Iran. On the supply side, India also has to exercise much bigger options for use of renewable forms of energy, resources for which are in abundance in this country. But there is also need to manage demand for energy effectively in the long run.

Going back to the issue of the annual budget, it is not clear how much the Finance Minister can really do to set the country on a course that helps to develop an integrated energy strategy and enhance security of supply. But given the fact that the Five Year plans, which were a major instrument for defining long-term policies in this country earlier, now have very limited value in setting new directions, the annual budget assumes much greater importance in serving the longer term interests of Indian society. One hopes that some of these issues will be considered and embedded in the annual budget this year. If not, then perhaps it would not be too late to start an exercise both for meeting the objectives of sustainable development as well as energy security by the time the monsoon session of Parliament begins.

(The writer is the director-general of TERI and chairman of the Intergovernmental Panel on Climate Change)

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