In time honoured tradition the finance minister will present the budget later this month. It will no doubt be a sophisticated statement of government accounts, taxes and duties interspersed with schemes for the poor and laced possibly with vernacular quotes. It will attract considerable media attention and superficial commentary. My hope is that the minister will use this opportunity of a captive nationwide audience to enunciate the government’s long-term vision for energy and embed that through a structure of facilitative taxes and duties. I have this hope not simply because energy is critical to sustaining growth but also because of the unhealthily strong nexus between increasing affluence, energy demand and environmental degradation.There is wide consensus that despite social and income disparities, our poor physical infrastructure and slipshod governance, the Indian economy is on an autopilot trajectory of at least 6 per cent growth. I am almost in that camp but Jared Diamond’s book Collapse has left me with a nagging concern. In it he argues that a major contributor to the collapse of some of the richest and most technologically robust ancient societies like the Mayans of Central America, Angkor Vat in Cambodia and even our Indus Valley was the inadvertent (if not advertent) destruction of environmental resources. Diamond describes the main processes by which the environment was damaged and warns that all of these processes are in abundant evidence today. In fact he adds, modern societies have to wrestle with the additional challenges of climate change and energy shortage. Diamond contrasts these societies with others where through sound leadership and public involvement the environmental problems were successfully overcome. And reinforces his underlying message by pointing to their continued growth and prosperity.There are few countries in the world today that can boast of a macro economy with our set of composite positives. Growth in FY 2006 will exceed 7 per cent; inflation is still under control despite high oil prices; real interest rates are competitive; the exchange rate is stable and we have over $150 billion in foreign exchange reserves. In addition, many of our companies and not just in IT services are producing world class products at less than world class prices. The reasons for the optimism are therefore justified. It is grounded on solid economic performance. We could however still get pushed off the growth turnpike. There are many uncertainties. And one of the most critical is energy.Today we import 70 per cent of our domestic hydrocarbon requirements. Two decades back we imported only 30 per cent. And despite recent discoveries this imbalance is projected to worsen. More worrying almost 90 per cent of our energy consumption is based on fossil fuels (i.e. coal, oil and gas). In consequence we confront not only the vicissitudes of the international market but also the risks of environmental pollution. Our policy priorities must therefore be energy security and environmental protection.Against this backdrop, what specifically should the FM address?First, I believe he should make an explicit and unequivocal commitment to increase the share of renewables in the energy basket. To what extent and within what time period can be left indeterminate but a statement of intent should be delivered. And to bolster this statement, he should propose fiscal incentives to companies that invest in the R&D of “frontier” energy systems (e.g. hydrogen fuel cells for vehicles and power generation); clean technologies (e.g. gasification of coal) and/or clean fuels (e.g. the conversion of gas to ultra clean liquids or biofuels). He should offer tax rebates to companies that switch to solar energy and he should push financial institutions like NABARD to broaden their coverage of low cost financing for renewable energy systems. Today a major constraint to the spread of solar lighting is the high upfront cash requirement. If this were eased and solar made more affordable and accessible, the benefits for rural families currently reliant on traditional fuels (e.g agricultural waste, dung and firewood) would be enormous.Second, the FM should rationalise the current pricing, duty and subsidy structure for petroleum products. It is not an efficient structure. And it is causing environmental and corporate damage. Everyone knows, for instance, that the pricing structure for petrol, diesel and kerosene is the reason for adulteration. Dealers have an incentive to spike kerosene into diesel and the consequent result is not just poor quality fuel but increased pollution. It is also now well known that the burden of high and volatile international oil prices has been borne disproportionately by the public sector oil marketing companies (IOC, HPCL and BPCL). They have all reported a third quarter loss and IBP (IOC’s subsidiary) is on the brink of BIFR. This structure is not only eroding national assets but it is also weakening the capability of companies to invest in clean technology and clean fuels.All countries face the conundrum of how to share the burden of high oil prices. Most have however now evolved a formula wherein the governments get an assured stream of revenue; the oil companies receive an acceptable return and the consumers are protected from price gouging. One driver behind granting greater sway to market determined pricing in these countries including China and Indonesia which has hiked retail prices is not simply efficiency but also demand conservation. Here one should point out that India is among the most inefficient users of oil. For every $1000 increment in our GDP we consume an additional 1.5 barrels of oil. The comparable figures for France, Italy and the UK is 0.5 barrels and for the US 0.75 barrels. My hope is that with the help of the Rangarajan Committee the FM will inter alia replace the current advalorem structure with a specific tax; remove the duty differential between crude and products; introduce VAT for petroleum products and push for the reduction of sales tax across the different states.Finally, the FM should underscore the importance of natural gas as a bridge fuel. This is not only because gas is a cleaner and more economic fuel than oil but also because it is in greater abundance. Reliance and ONGC have made substantive discoveries. And the international gas pipelines (viz. Iran-Pakistan-India, Bangladesh-India and Myanmar-India) await development. I know each project faces seemingly insurmountable political hurdles but to paraphrase Keynes man will do the rational once all other alternatives have been tried and failed. There is also Liquefied Natural Gas (LNG), which whilst generally more expensive than either domestic or pipeline gas is significantly cheaper than liquid fuels. The FM should provide fiscal and regulatory encouragement for the accelerated use of gas. This is because in the current context of high gas prices and our abundant coal reserves, there is apparent economic logic for sidelining gas in favour of coal. However, if the environmental costs of thermal power generation were built into the economics and a longer term view taken of gas prices, this logic might not look so compelling. Certainly it would be a pity if short term considerations saddled the country with projects that led to the emissions of higher levels of carbon dioxide than are sustainable.Vikram Singh Mehta is chairman, Shell India. These are his personal views
