Rupee fall has made the need for energy reform all the more urgent
India's current economic crisis - the current account deficit is at a historic 5 per cent of GDP - has
catalysed the steps to reform the sector. A widening CAD has
weakened the rupee, making fuel imports costlier.
Energy reform in India has a new champion: Finance Minister P. Chidambaram. He has been hardselling the idea to multi-party parliamentary groups which call on him, pointing out that for economic growth, enhanced domestic production of coal and gas is essential. Chidambaram played a key role in pushing through the controversial new gas pricing formula, which links India's domestic gas price to international prices, a fellow cabinet minister revealed.
The formula will affect prices, but disparate voices in the government say this is inevitable. India's current economic crisis - the current account deficit (CAD) is at a historic high of five per cent of gross domestic product - has catalysed the steps to reform India's energy sector.
A widening CAD has weakened the rupee, making fuel imports costlier. The overarching themes of energy reform are: gradually link domestic market prices to international prices and end subsidies in phases so that all customers, retail or corporate, pay market prices.
It's not just cabinet ministers who are championing this reform. Separately, regulators are doing the same. Even the 14th Finance Commission, chaired by former Reserve Bank of India governor Y.V. Reddy, has been asked to make its recommendations, assuming that electricity tariffs in future will not depend on the whims of politicians.
To get back to Chidambaram, what's triggering the urgency?
It is the fiscal deficit, the one indicator finance ministry officials obsess about as credit rating agencies and analysts constantly question them about it. The fiscal deficit in 2012/13 was 4.9 per cent of GDP. Chidambaram has charted a path to cut it to three per cent of GDP in another four years. The key to that is reducing the extent of subsidies, particularly energy subsidies.
The Asia editorial director of global energy information provider Platts, Vandana Hari, says the rationalisation of subsidies is a step in the right direction. "India has a complex web of subsidies, and at the end, the ultimate consumer gets an unfair deal. These signals from these reforms are positive, and will encourage observers globally," she says. She was particularly upbeat about the recent revision of the gas price formula.
The journey along this path is not going to be smooth. The immediate hitch is the turmoil in the foreign exchange market. Since April this year, the Indian currency has fallen about 10 per cent against the US dollar.
During this period, the under-recovery of oil marketing companies on diesel - part of which is met by energy subsidies - has more than doubled from Rs 3.27 to around Rs 8.09 a litre despite regular diesel price increases since September in an effort to pare subsidies. This has already had an adverse impact on the business plans of private oil companies, which do not get government compensation for subsidising the retail price of diesel.
"There is an urgent need to fix the depreciation of the currency. What the RBI is doing by banning derivatives and adopting some other methods are shortterm fixes. It must look at ways to increase the faith of FIIs (foreign insitutional investors) in India, and also bring in FDI (foreign direct investment)," says Anis Chakarvarty, Chief Economist at Deloitte Touche Tohmatsu's India chapter.
Three months ago, Reliance Industries, Essar Oil and Shell India were planning to revisit their retail business and expand their bases. In fact, some had even refurbished existing outlets. "Things have gone back to square one with the dipping currency," says an official from a private oil company.
The depreciation of the rupee reflects the country's overall macroeconomic weakness and requires the government to simultaneously address many issues. One of them is to deal with coal shortages for the power sector. To its credit the government is making some efforts. It is working to revise the imported coal index, vital for determining the electricity tariff from power plants using imported coal. Currently, the index is the average of imports from two countries, South Africa and Australia. The finance and power ministries want to include Indonesia, from which India has begun importing a good deal of coal in recent years.
"The coal sector is characterised by acute shortages, poor quality, inefficient mining practices and distorted pricing mechanisms. These factors have had a crippling effect on power generation and manufacturing," says Nandakumar, Senior Director, Infrastructure, India Rating and Research.
Recently, the central electricity regulator allowed Adani Power and Tata Power to pass on an increase in the price of imported coal to end consumers. Both have power plants at the port city of Mundra, Gujarat, and are based on imported coal. The regulator has formed a committee under HDFC Chairman Deepak Parekh to decide how much more the two companies can charge to compensate for the new price of coal.
Separately, the Cabinet allowed Coal India to import coal to offset fuel shortages at power plants and pass on the relatively higher price of imported coal to consumers. With many problems of the sector being attributed to the virtual monopoly enjoyed by state-owned Coal India, the empowered group of ministers under Chidambaram has also cleared a bill to bring in a regulator, which will effectively end the monopoly.
The new gas pricing formula may well invite more criticism once the monsoon session of Parliament starts. However, analysts see the cabinet decision as a positive development. Ben Wetherall, an analyst at global energy information provider, ICIS, says: "This is a good time for India to rework its exploration activities. But the reality is that gas and gas competition is here to stay. India will have to work out its plans."
The formula will affect prices, but disparate voices in the government say this is inevitable. India's current economic crisis - the current account deficit (CAD) is at a historic high of five per cent of gross domestic product - has catalysed the steps to reform India's energy sector.
A widening CAD has weakened the rupee, making fuel imports costlier. The overarching themes of energy reform are: gradually link domestic market prices to international prices and end subsidies in phases so that all customers, retail or corporate, pay market prices.
India has a complex web of subsidies, and at the end, the ultimate consumer gets an unfair deal: Vandana Hari
To get back to Chidambaram, what's triggering the urgency?
It is the fiscal deficit, the one indicator finance ministry officials obsess about as credit rating agencies and analysts constantly question them about it. The fiscal deficit in 2012/13 was 4.9 per cent of GDP. Chidambaram has charted a path to cut it to three per cent of GDP in another four years. The key to that is reducing the extent of subsidies, particularly energy subsidies.
The Asia editorial director of global energy information provider Platts, Vandana Hari, says the rationalisation of subsidies is a step in the right direction. "India has a complex web of subsidies, and at the end, the ultimate consumer gets an unfair deal. These signals from these reforms are positive, and will encourage observers globally," she says. She was particularly upbeat about the recent revision of the gas price formula.
The journey along this path is not going to be smooth. The immediate hitch is the turmoil in the foreign exchange market. Since April this year, the Indian currency has fallen about 10 per cent against the US dollar.
During this period, the under-recovery of oil marketing companies on diesel - part of which is met by energy subsidies - has more than doubled from Rs 3.27 to around Rs 8.09 a litre despite regular diesel price increases since September in an effort to pare subsidies. This has already had an adverse impact on the business plans of private oil companies, which do not get government compensation for subsidising the retail price of diesel.
"There is an urgent need to fix the depreciation of the currency. What the RBI is doing by banning derivatives and adopting some other methods are shortterm fixes. It must look at ways to increase the faith of FIIs (foreign insitutional investors) in India, and also bring in FDI (foreign direct investment)," says Anis Chakarvarty, Chief Economist at Deloitte Touche Tohmatsu's India chapter.
Three months ago, Reliance Industries, Essar Oil and Shell India were planning to revisit their retail business and expand their bases. In fact, some had even refurbished existing outlets. "Things have gone back to square one with the dipping currency," says an official from a private oil company.
"The coal sector is characterised by acute shortages, poor quality, inefficient mining practices and distorted pricing mechanisms. These factors have had a crippling effect on power generation and manufacturing," says Nandakumar, Senior Director, Infrastructure, India Rating and Research.
Recently, the central electricity regulator allowed Adani Power and Tata Power to pass on an increase in the price of imported coal to end consumers. Both have power plants at the port city of Mundra, Gujarat, and are based on imported coal. The regulator has formed a committee under HDFC Chairman Deepak Parekh to decide how much more the two companies can charge to compensate for the new price of coal.
Separately, the Cabinet allowed Coal India to import coal to offset fuel shortages at power plants and pass on the relatively higher price of imported coal to consumers. With many problems of the sector being attributed to the virtual monopoly enjoyed by state-owned Coal India, the empowered group of ministers under Chidambaram has also cleared a bill to bring in a regulator, which will effectively end the monopoly.
The new gas pricing formula may well invite more criticism once the monsoon session of Parliament starts. However, analysts see the cabinet decision as a positive development. Ben Wetherall, an analyst at global energy information provider, ICIS, says: "This is a good time for India to rework its exploration activities. But the reality is that gas and gas competition is here to stay. India will have to work out its plans."
