governance, political economy, institutional development and economic regulation

Shortages make people do crazy things. In the 1970’s a Bajaj scooter was a prized posession because it was most easily available against payment in US$, as were denim jeans, which were smuggled in or sold by the firangi “flower children” flooding India for hash and nirvana. In the 1990’s, the humble Maruti 800 beame a “must have” since the only other options were the gas guzzlers; Ambassador and Premier Padmani. In the 2010s, gold is the the “go to” asset, as the INR crumpled.

Countries are no different. The neglect of long term, efficient, development of India’s domestic energy sources (coal, hydro, solar, wind and biomass) have made economic growth artifically dependent on petro products (gas and oil), as the fast and easy option to add electric power capacity. 30% of petro consumption today is for this purpose. Stagnating coal production, increasing coal imports, further bolster petroleum as the “go to option” for power generation. Highly efficient generation technology (developed for gas surplus countries like UK, US and now Africa) adds to the “green” character of gas based generation versus coal. Constrained by domestic supply side issues and seduced by external incentives (climate change and the engineer’s incentive to use the “best” technology) to switch to petro and gas, India fell headlong into the “shortage syndrome”- best recognised by a panic stocking up of goods….in this case gas based power plants (their installed capacity exploded since 2000), diesel fueled generators, diesel powered trains and diesel powered ground water pumps as short term answers since 2000 to the low availability of electricity.

The Mahatma’s concept of “Self Sufficiency” ceded defeat since the 1980s to the dominant, liberal, concept of an “open” economy via international movements in trade and capital (though not people). However, within this mantra “pricing power” has to be contended with by “small” buyers like India. We should learn from the US ( a big buyer) where the rapid expansion of domestic shale gas production was doggedly pursued and has decreased reliance on gas imports, leading to a reduction in international gas price. Even a “big buyer” like the US does not like being beholden to imported energy.

We are too small to move world petro/gas prices by reducing our energy import demand. However, energy security concerns should induce us to tax petro and gas consumption heavily to limit demand. We don’t do this today. The eternal scare has been the fall out of retail energy price induced inflation, but this is really a timing issue. The time to adjust energy prices upwards is when inflation is low or when energy prices dip. Today baby steps are being taken in this direction. What we need is to stride forward.

Our energy strategy is short sighted. (1) It does not limit the use of gas purely for industrial, road public transport in metros and cooking fuel use, as it should (2) It does not cap the use of petro products for power generation to existing generation capacity (3) It does not aggressively pursue hydro power generation where we have exploited only 40% of our potential. (4) It postpones rapid coal mining reform, principally due to political economy constraints. The only bright spot is the growth in renewable generation and market friendly domestic energy trade practices.

A very high Current Account Deficit (shortage of US$ to pay for imports) re-emerged as a major fiscal destabaliser in 2013, after more than a decade of stability in the external account. This is a sharp reminder, that external account stability (and our energy security) is hostage to energy imports. We import a very high proprtion (75%) of the petro and gas we consume. These constitute 40% of our import bill. India’s export performance (and hence its capacity to pay for imports) has been good. Our share of world merchandise exports increased from 0.4% in 1990 to 1.7% in 2010 (WTO 2013). Export of commercial services did even better with our world share increasing from 0.8% in 1980 to 3.3% in 2011. However, none of these export achievements have been enough to overcome the insecurity of having to import energy security in US$. Annual Petro imports (US$110 billion) are a high 50% of our FEx reserves (US$ 220 billion). China imports only 50% of the petro products it consumes and the prospect of this increasing to 70%  by 2020 (IEA) has them worried. This is despite the fact that their annual energy imports amount to only 20% of their FEx reserves. We cannot continue to be hostage to energy imports.

TERI Energy Map 2030, recommends the following steps to reduce dependence on petroleum imports: (1) Electrify rail and save diesel.   Today less than 30% of the rail track is electrified. (2) Switch passenger and freight transport to rail and save diesel by avoiding dependence on road transport. Today only 30% of the goods traffic uses rail and the share of road transport is expected to grow from 70% today to 85%. This trend needs to be reversed. (3) Increase domestic coal production which is one of the three dominant eneregy sources (hydro and solar being the other two) in India (4) Increase hydro based generation, whose share has reduced from 40% in 1980 to 12% in 2012, due to ineffective planning strategies and a defeatist approach to the genuine concerns of citizens with potential environmental fall outs. (5) Price energy competitivey to remove distortions in consumer demand across products (please we don’t need diesel powered motorcycles) and incentivise energy conservation.

Like our defence policy and our diplomacy, our energy policy is too status quoist and backward looking, to serve us well. We are not planning for a secure energy future.

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