In a recent terse announcement, ONGC Videsh Ltd (OVL), the overseas investment arm of the Oil and Natural Gas Corporation (ONGC), reported that the production of oil and oil-equivalent gas dropped by 7.35 per cent in 2011-12. OVL produced 8.753 million tonnes (about 175,000 barrels per day) in 2011-12, compared to 9.45 million tonnes (189,000 barrels per day) in 2010-11.
The fall was attributed to the “difficult geo-political situation in Syria and Libya”, an understatement that would make any diplomat proud. This was one concrete sign of the damage the Arab Spring caused to the Indian economy.
More obvious signs were, of course, the rising trade gap and the enormous fiscal deficit. Matters have been exacerbated by a fuel subsidy policy implemented to the point of reductio ad absurdum.
The Bharat Bandh called to protest the recent 12 per cent rise in petrol prices indicates that the Opposition, as well as the Congress’ allies, is not prepared to condone rationality. One wonders why the government didn’t also hike diesel, kerosene and natural gas rates, and cut subsidies on nitrogenous fertilisers as well, and have done with it all at one go.
The protests would have occurred anyhow. There will be new protests soon enough, as and when the government is forced to raise the controlled prices of those other fuels. So a big bang approach may have worked better. The protests would have been a little louder, but the economic benefit would have been a great deal more if all subsidies had been rationalised.
India’s adoption of a planned economic approach and the associated policy of self-sufficiency via import-substitution have generated reams of economic and historical analysis in the last 60 years. So has the fuel subsidy policy.
In hindsight, there was one obvious reason why, in twitter-speak, this policy was #alwaysfail. One wonders why it wasn’t foreseen since it was obvious in the 1950s itself: India is deficient in domestic sources of fossil fuels.
Many major Second World War campaigns, as Nehru and his cohorts surely knew, had been predicated by a need to secure fuel supplies. Japan attacked Pearl Harbor because in order to grab Indonesia’s oil, it had to use the Philippines as a base, and it couldn’t invade the Philippines without destroying US naval forces in the Pacific. Germany invaded North Africa and Russia in similar hopes of getting hold of oil.
Coming back to India, there was – and is – no way to develop domestic substitutes to meet the entire demand for crude and gas. Hence, there was – and is – no reasonable way to avoid fuel imports. A policy of import substitution and self-sufficiency has always been a joke for that one reason.
Nor is there a reasonable way to plan for and budget subsidies for a necessary commodity which has variable and volatile prices that cannot either be known in advance or be controlled. This makes the subsidy policy a joke as well.
How did the highly cerebral men who set up the planned economy miss this seemingly obvious point? Perhaps it was so obvious that it wasn’t worthy of their attention.
So, India embarked upon a flawed economic policy in the 1950s and compounded it in the 1970s when the Organisation of the Petroleum Exporting Countries started flexing its muscles. The economic history of India since the first Yom Kippur oil shocks can be explained quite well by the correlation to international crude prices and the external supply shocks that have periodically arisen on that account.
There are two compulsions imposed by a need to import fuels. One is a need to develop exports to cover that bill. Another is to develop a domestic economy robust enough to cope with price fluctuations, and subsidies will not help with that. Unfortunately for the economy, recent developments show that the entire political establishment would prefer to continue to imitate that noble but somewhat delusional bird, the ostrich.