R is for re-regulation

The report is presented to the government in 1996 and after the expected round robin of bureaucratic and political questioning, it is approved by the cabinet and gazetted as policy in 1998. The bulk of its recommendations are then implemented on April 1, 2002.

Fast forward to the present. The Gazette notification stands unaltered. The private sector does indeed have access to EP, refining and marketing. The APM remains abolished and the public sector companies have formal autonomy to operate outside the ambit of bureaucratic control. This is the 8216;de jure8217; current situation.

The de facto reality is, however, radically different. Competition is minimal; the public sector continues to dominate the sector. Prices are not set by the market; the government dictates them. Subsidies on LPG and kerosene have not been removed; they remain and the oil companies continue to bear the burden.

The sector has, in short, been stealthily re-regulated.

The implications of this disconnect between de jure policy and de facto reality are serious. At a quantifiably tangible level, the disconnect is eroding the financial health of the oil companies. This is because the government administered price of petroleum products is lower than the market cost of producing them. Estimates vary but the most frequently reported numbers suggest that the PSUs will lose about Rs 50,000 crore over this fiscal year.

At a broader level, the disconnect is diluting the efficiency gains that derive from competition and it is undermining the capability of companies to fund R038;D for the development of clean technology and renewable alternatives to fossil fuels. Competition is being throttled by the policy skew in favour of the PSUs. The government compensates PSUs for part of their losses through the issue of oil bonds and subsidies. These concessions are not available to the private companies. As a result the private companies have been compelled to reorient their marketing plans. Reliance has, for instance, recently converted its refineries into an Export Oriented Unit EOU.

The decision makes economic sense for Reliance. They capture the relatively high international margins and by minimising the sale into the local market they mitigate their domestic losses. Also they benefit from the duty concessions proffered to EOUs. It may not, however, make sense for India. For it could lead to a situation where despite having surplus refining capacity the country may be compelled to import relatively more expensive petroleum products. Reliance is not alone in adjusting its marketing plans. The end result will be a re-run of the conditions that prevailed for the two decades post the nationalisation of the private oil companies in the mid 8216;70s and before the commencement of economic reforms in the mid 8216;90s.

International petroleum companies are among the biggest investors in clean technology and renewable energy. They are not doing this out of charity. They are doing it because they recognise that the consumers want to move towards an energy system that is less dependent on fossil fuels. The Indian companies should also be making a comparable effort not simply because it is the future but because India must somehow reduce its vulnerability to the vicissitudes of the international oil market and, more important, weaken the current unhealthily strong link between economic demand, energy demand and environmental degradation. Unfortunately, the companies are not making such an effort. The reasons may be several but one must be their balance sheet. Given current conditions the management is focused on cost cutting to reduce losses rather than on plans to develop clean technology or to fund R038;D.

At a deeper level, the re-regulation of the petroleum sectors throws up questions of the sanctity of the institutions of decision-making. After all, the 8216;R8217; group report was not a casual exercise. It involved the executive and the legislative arms of the government. It passed parliamentary scrutiny and was endorsed by the cabinet. To have it then so summarily bypassed suggests an erosion of the nature of the relationship between the different organs of our government.

Everyone knows, of course, the reasons why 8216;R8217; group recommendations have been bypassed. It is because politicians fear a voter backlash to high prices. They see this as good reason for sublimating economic logic and institutional propriety to populist irrationalism. But is that reason enough to ignore the Solomonic forewarning 3000 years back, 8216;where there is no vision, the people perish8217;, or Churchill8217;s relatively more recent comment, 8216;the era of procrastination8217; will inevitably give way to 8216;a period of consequences8217;.

The writer is chairman, Shell Group in India. Views are personal