Opinion The price is wrong
We know how to price fuel right. But we just will not
For an energy-short country that has decided to play a leading role in climate adjustment policies,we are very uncoordinated on fuel policy,particularly in our approach to fuel pricing. This is particularly distressing since we actually have a very good tradition of studying fuel pricing policy. In the first energy crisis,in the 70s,a policy of savage taxation of petroleum,oils and lubricants,a large expansion of coal supplies after nationalisation,and back-up pricing led to a rapid control of energy-led inflation,and a reduction of energy import growth rates,even as the economy was growing fast. Wags said that Britain fought the energy crisis with the discovery of North Sea gas,and India with a fuel policy report.
We now,again,have a new fairly good fuel policy report but we should not be too sanguine about the outcome. Distribution reform in cities like Agra and Bhiwandi,now privatised,followed the Delhi model,and together with the technological investments in grids,metering and so on has led to immense possibilities for the electricity sector turning the corner. But political support at the highest level is not there,nor has pricing reform taken place to hasten the process. In fact,more often than not,pricing issues go to the appellate machinery delaying the impact of the reform.
What this means is that we are left with a situation in which grid codes are in place,and so is the wheeling hardware but the pricing signals are haywire. The only sensible pricing document was the first electricity regulators consultation paper on fixing electricity tariffs,but after he remitted office it sank like a stone. And with it did some very useful concepts: long-range marginal cost pricing,and efficiency principles in transmission and distribution pricing. Badly qualified regulators use systems designed around cost-plus pricing,with ad hoc norms thrown in for efficiency,even though they know full well that those norms will not be followed. Power trading in India still follows command economy routines rather than the long-run efficiency criterion.
And as if that is not bad enough. When you move away from electricity,fuel pricing in India gets even more chaotic. Gas pricing,which was to follow the principles of sovereign rights,is now in some no-mans land. The policy of following,to an extent,prices at the border,which had raised hopes that Kelkars guidelines may eventually be followed,was short-lived. And,since then,no clear criteria have emerged for pricing the sovereigns monopoly well.
Meanwhile,the signal that energy-intensive industries like nitrogenous fertilisers would have a market regime in which to work gave way soon enough to the rules of the jungle leading to a considerable dampening in the enthusiasm of various possible investors. Indias dependence on imported nutrients,at considerable cost,is now almost ensured. This dependence has,in the last few years,gone up and up at a considerable cost to the nation since imports are far more expensive than the average price given to domestic suppliers. It was expected to fall as we introduced a policy of domestic investment in expansion and balancing,and supplemented it with a collar and cap for expansion but it is now in jeopardy again,with increased uncertainty in gas supplies.
Bits of the Kirit Parikh long-term fuel policy report are with the angels now. This costs us precision in our signals on fuel price policy. At a general level,the report follows the laws of the market which in an energy-importing economy means border pricing. Parikh,however,makes an exception for sustainability principles where he follows tax subsidy formulas somewhat grudgingly for,even though he is an engineer,he is also an economist. So the exceptions to the market are frugal,as in the case of environmental costs or equity compulsions.
Take an example. Ensuring direct cheap supplies of LPG for clean energy in the hills or adjoining forest areas,if necessary,is not objectionable,for trees must not be cut for fuel. But the idea that in cities poor households use kerosene for cooking is pointless because they dont,and it goes to adulterate diesel,with all the attendant environmental costs. It is time to get the dust removed from the long-term fuel policy report,and get it back in the policy-makers file.
The writer,a former Union minister,is chairman,Institute of Rural Management,Anand express@expressindia.com
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