Sequencing reform

Energy pricing must be freed at the consumer end

The energy sector badly needs reform. India has notoriously poor electricity supply, which has hampered the growth of the manufacturing sector. Meanwhile, energy costs for consumers are not noticeably low, in spite of huge government subsidies on fuel and on electricity - which are largely responsible for high deficits. Policy mismanagement and pricing distortions across the energy space are responsible in large measure for this situation. At the retail end of the chain, prices of diesel, compressed natural gas, liquefied petroleum gas and kerosene are controlled, and so are power tariffs. However, India imports 80 per cent of its crude and 30 per cent of its natural gas. It is also among the world's largest coal importers. The high international prices of these commodities are not passed on to end-users. Hence, companies supplying electricity and retailing petroleum products suffer losses. Not coincidentally, these companies are owned by the government, since private players are unwilling to enter this space.

A complex subsidy mechanism is applied to oil refining and marketing. The oil and gas subsidy came to about Rs 1.45 lakh crore in the last fiscal year. It was shared between oil-producing public sector undertakings and the central government. Meanwhile, power sector losses run at about Rs 60,000 crore per annum. Cash-strapped state-owned power distribution companies cannot repay loans, or even settle with suppliers such as Coal India and National Thermal Power Corporation, the country's largest power producer. Despite power shortages, there has been controversy over tariff hikes in the Mundra projects of the Adani and Tata groups. Both projects run on imported coal, which became more expensive. Large gas-based power capacities are also sitting idle. Power sector losses have led to a banking crisis. The latest bailout involved restructuring almost Rs 2 lakh crore in unpaid loans by state power distribution companies. The states issued bonds as part of a debt restructuring package.

The fiscal burden on the energy account is, therefore, huge. The situation cannot be rectified without charging the end-user rational prices. But movements towards market pricing of fuels and towards rational power tariffs have come only in fits and starts. There have been gradual hikes in the retail price of diesel, and restrictions on the number of subsidised gas cylinders. The State Electricity Regulatory Commissions have allowed some hikes in tariffs. But governments have been terrified of the inflationary effects and of the likely political unpopularity of price increases. The Atal Bihari Vajpayee government had first mooted the free pricing of energy, but the administrative pricing mechanism still exists. That government's Electricity Act, which mandated the unbundling of state utilities and allowed consumers open access to electricity suppliers in order to create competition and easy power trading, has not been fully implemented. The new regime, with its comfortable majority, is well placed to eliminate - or at least substantially reduce - these pricing anomalies. The prime minister could point to the Gujarat model - that state has a good gas grid and 24x7 power supply. Gujarat's consumers pay market rates for gas and power.

Global oil prices remain relatively low. Domestic prices and tariffs could be allowed to align to market rates without instant translations into large increases. However, any escalation of the troubles in Iraq will change that. Ideally, the new government should look to ways of tackling energy subsidies as soon as it can.