View: Emerging oil realities just showed India the road it must take from here
There’s been a flare-up in the politics of automotive oil pricing of late. The Bharat Bandh called by opposition parties last Monday was to protest record retail prices of diesel and petrol. But policymakers in charge need to stay the course, for now.
It makes perfect macroeconomic sense to pass on rising global crude oil prices to consumers, and duly revise retail prices of the main petroleum products against the backdrop of a weaker rupee vis-à-vis the strengthening dollar.
True, the structure and quantum of consumption taxes in retail prices of petrol and diesel need reform. Yet, the fact is that overall consumer price inflation remains moderate, and in such a scenario, hardening retail prices of petro-products would actually lead to fiscal prudence and arrest runaway demand for oil.
Note that retail taxes on diesel and petrol now add up to over Rs 5 lakh crore per annum, and the revenue so garnered does help to keep the fiscal deficit as per budgeted levels. It is also a fact that the current account deficit, which denotes revenue imbalance on the external account, has been rising lately, no doubt due to elevated crude oil prices. We are overwhelmingly dependent on crude imports, and any bid to artificially lower retail prices of the main petro-goods would merely fuel oil demand and worsen the current account deficit.
Further, India is now the third-largest importer of crude oil, as the demand for automotive fuels has been going up by leaps and bounds, for years. And, attempting to revise oil prices by fiat in the here and now would have untoward consequences and send wholly wrong price signals.
The Union Cabinet has, meanwhile, taken steps to boost ethanol blending of petrol to make it more price attractive. The policy objective is to proactively step up supply, by mandating that ethanol derived directly from sugarcane be priced higher than that derived as a by-product from molasses.
However, in an increasingly water-stressed economy, aiming to increase acreage of a water-guzzling crop like sugarcane can have only a very limited upside. A more sustainable solution can be modern bio-refineries that use bio-wastes as feedstock.
But a much more promising solution is to produce methanol from high-ash coal, and use it for blending diesel and petrol. The expert view is that methanol burns well in all internal combustion engines, and produces no particulate matter or soot, and is far more environment friendly than other fossil fuels. NITI Aayog has put out policy papers which estimate that methanol from indigenous feedstock can cost as little as Rs 19 per litre, and can be blended up to 15% with petrol and 20% with automotive diesel.
It is averred that methanol can wholly replace diesel in industrial generators, power modules in mobile phone towers — there are 7,50,000 of them nationally — and substitute for cooking gas imports. The way forward is to explore foreign tie-ups and rev up methanol production.
In parallel, there seems much potential to tap solar energy, as a replacement for diesel, to run agricultural water pumps. A solar pump can provide dependable and affordable energy for irrigation, and fast-forwarding its usage would make ample sense.
But, in tandem, what’s required is to have policy in place for speedier diffusion of electric vehicles. The plain fact is that the internal combustion engine is not very energy efficient, and modern e-vehicles promise far more resource productivity. And the way ahead here is to have much sprinkling of solar-powered charging points on the ground, so as to accelerate adoption, usage and environmental benignness of e-vehicles.
The point remains that oil imports have led to outright balance of payment problems for three whole decades up to the uncertain 1990s. The economy is now much more robust, but oil can still jack up the current account deficit. Hence the need for further oil sector reforms.
While passing on higher imported costs of crude is sensible, we nevertheless need to reform the voluminous oil economy. And the road to traverse is to open-up oil marketing to the larger retail industry, as is par for the course in the mature markets. We can well do away with routine ringfencing retail sales of oil products, in effect, solely for oil companies.
The figures suggest that ‘independent retailers’ abroad account for about half the retail oil offtake there.
We also need to reform and modernise oil taxes, so as to put paid to the high-cost and cascading tax-on-tax regime at each stage of output for the main petro-goods, and bring all petro-products under the goods and services tax regime, albeit with limited tax set-offs for oil items, as is the norm globally. The bottomline is that we must widen the indirect tax base and not rely so much on oil revenues.