An integrated energy policy

With oil bonanza over, time for a relook at energy options

India’s three-year run of oil bonanza now seems to be truly over. In 2014-15, the first year of the National Democratic Alliance government under Prime Minister Narendra Modi, the average price of the Indian basket of crude oil fell to $84 a barrel, a drop of about 20 per cent over that in the previous year. In 2015-16, the annual drop was even higher at 45 per cent with the average price of the Indian basket of crude oil hovering at around $46 a barrel. The average price in the following year increased only marginally to $48 a barrel, but the gains continued to be substantial for the oil sector, the economy, and the government. Oil companies began turning in higher profits and retail selling prices for petrol and diesel fell by 17-22 per cent by January 2016, compared to those prevailing in May 2014. The Union government’s subsidy bill for petroleum products declined significantly from Rs 0.85 trillion in 2013-14 to Rs 0.27 trillion in 2016-17. It also used the opportunity to increase taxes on petroleum products to reap the benefits from falling crude oil prices. Its excise duty collections during these three years saw a cumulative annual growth rate of 46 per cent, helping it to stay on the path of fiscal consolidation.

All that has begun changing from the beginning of 2017-18. The average price of the Indian basket of crude oil in the first nine months of the current year has risen to $53.58 a barrel. The numbers for November and December crossed the $60-mark for the first time this year for two consecutive months. Retail prices of petrol and diesel have also inched up to record a rise of 18-35 per cent, compared to prices in January 2016, when the crude oil prices fell to their lowest in the last three years. The increase would have been more but for the government intervening last October to reduce excise duty on petrol and diesel, a move that resulted in an annualised revenue loss of about Rs 0.26 trillion. As a consequence of higher crude oil prices, the government’s petroleum subsidy bill has also risen by 13 per cent at the end of November in the current financial year.

With no signs of the international crude oil prices declining from their current elevated levels, it is time, therefore, for the government to refocus its attention on the need for calibrating its energy policies to make the best policy choices in the current situation. By most indications, India’s energy demand in the next few decades will increase faster than that of any other large country. Its dependence on energy imports will also rise, which will be a challenge that policymakers will have to face in the coming years. Technological developments and sustainability issues will become as important as the question of pricing energy products and fiscal policy options that the government will have to exercise in such an environment. There will be a need, therefore, for an integrated energy policy that takes into account the feasibility and scalability of the renewable energy sector and the larger challenge of meeting the sustainability goals. This brooks no further delay.