Half-baked energy reforms

Reform for LPG, but coal order ignores need for regulation

The government is taking some important steps forward on the question of fuel availability and prices. The Cabinet Committee on Economic Affairs recently announced that diesel prices would be "market-determined", following a process of gradual change of prices that allowed end-users to get used to the end of a subsidy regime. Now, Petroleum Minister Dharmendra Pradhan has told this newspaper that the even knottier question of the subsidy on liquefied petroleum gas (LPG) is to be addressed. The number of subsidised LPG cylinders is already capped at 12 during a year. The petroleum ministry is now working on a system by which the total subsidy for a cylinder will also be capped. Currently, the taxpayer pays around Rs 466 a cylinder. Keeping this amount steady, or capping it, would limit the damage the LPG subsidy does to the fisc. It will also allow end-users to get used to price movement in LPG cylinders. Coupled with the roll-out of the direct benefits transfer scheme, it should lay the foundation of further reforms in this sector - for instance, eliminating those families that are above the poverty line from being eligible for LPG subsidies. Perhaps other criteria could be introduced to exclude beneficiaries - for example, those who pay income tax may be required to pay full price for cylinders. This is exactly the sort of gradual reform in a subsidy regime that yielded such rich benefits for diesel - a problem largely solved through monthly price increases of 50 paise a litre.

However, other signals are not so positive. The government's ordinance on coal, following the judgment of the Supreme Court that cancelled the allocation of over 200 coal mines, made between 1993 and 2011, is one such. It is an instance of the sort of half-hearted reform that the government can do without. True, it does fix the immediate problem - a shortage of domestic coal production, caused by the Supreme Court-ordered cancellation of the mining blocks. This may be why industry is welcoming it - the private sector is glad that the immediate crisis may have been averted. And there are other positives about the ordinance - for example, it introduces e-auctioning, to eliminate the opaque and discretionary allocation process followed in the past. And it transfers the monetary proceeds from such auctions to the states where the mines to be auctioned are located - which adds credibility to the government's claims of its commitment towards economic federalism and sharing of national resources with states in a more equitable way.

But the coal ordinance falls far short of what a reformist government should have done. A reformist government would have, first, struck at the root cause of the problem by removing Coal India's monopoly in coal mining. Commercial mining should have been allowed immediately, instead of just implying that it would be allowed sometime in the future following further reform. Second, it would have put in place an effective and independent regulator for the coal sector, even as it allowed actual users of coal to mine the blocks after winning them through e-auctions. And third, it would have clearly distanced the process of all decision-making on coal block auctioning from the coal ministry so that decisions are not influenced by the political establishment. The government should not postpone the real structural change that is needed.