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Energy Prices: NEW POLICY CRITICAL, by Shivaji Sarkar, 30 Sept, 2011 Print E-mail

Economic Highlights

New Delhi, 30 September 2011

Energy Prices

NEW POLICY CRITICAL

By Shivaji Sarkar

Is India in a difficult situation for high energy prices? Many believe it to be so. It is not only the prices of petroleum products that are shooting up given the international scenario and high domestic taxes, but so also the prices of gas, coal and electricity.

The energy prices are gravely affecting the cost of manufacturing, overall running of an organisation, and households. Dependence on oil has increased manifold, as it is being used for power generation, domestic and commercial generators. However, the dependence on coal has come down. But that does not mean it has been given up. The problem is different. Coal reserves are depleting and the cost of extraction increasing.

Therefore, coal prices have increased substantially and its supply to an electricity-demanding India remains uncertain. This has in turn impacted the setting up of new power plants as the supply linkages for many such units could not be affected. Importantly, price rise in power is affecting agriculture, which is the backbone of our economy, feeding around 70 per cent of the population. Both electricity and petroleum rates are continuously rising and have touched alarming levels which need to be drastically controlled.

On an average, the household sector has been the largest consumer of electricity, accounting for 29.3 per cent of the total consumption, with the commercial sector and agriculture following in step. However, the agriculture sector does not consume more than 8 per cent of the electricity generated.

Given the above scenario, many private sector power companies are wary of entering the power generation business. Their entry into the distribution sector has increased tariff by at least five times on the face of it but when calculated in real terms it is much more for the domestic sector. Worse, it is much higher for the commercial sector.

As a result, it drains the domestic economy and severely impacts profitability of the commercial sector. In addition, it leads to an escalation of prices of all goods just not in the commercial sector but also in the farm sector, which though getting subsidies has to pay a higher cost for electricity. As a result this raises the cost of food production as the middle men pocket the benefit on the hype of higher cost whereas the grower gets a low price and the consumer pays through his nose. Obviously, this adds to food inflation, which is now touching ten per cent.

Reserve Bank Deputy Governor Subir Gokarn states that high energy prices particularly of petrol, is a huge problem to deal with because it reduces the space for framing monetary policy. And thus, perhaps it is time to learn from Europe. During the past 80 years, it has been putting electricity consumption as a yardstick for development. This has led to an increase in all other energy requirement, particularly petroleum as most generating units there are based on it. This has shot up the petroleum prices as it is just not the transport sector that alone consumes petroleum.

Europe pays a very high tariff for electricity and all other energy needs. In 2005, European Energy Commissioner Andris Piebal had predicted the crisis that Europe finds itself today. He said that rising energy costs would adversely impact not only the well-being of EU citizens but also their economic growth.

In the US a study by Logility and Manhattan of 139 industries found that high power and other energy costs were becoming prohibitive. The industry magnates said that they were facing a problem of how to transfer the high cost to the consumer because if they did so their sales would be affected and if they didn’t then their investments in production would increase.

The overwhelming conclusion of the study showed that high energy costs give little choice for companies other than to optimize their supply chain network to design and improve planning and execution in a more holistic manner and to ultimately transform the dynamics and structure of their supply chains to support global operations. But managing this on a long-term basis has not been easy.

In the past year, the US forecasters have acknowledged that higher energy prices can become a drag on the overall economy. In fact, the economy was no longer able to absorb the energy price rise as these began to affect the prices of other goods and services. In the global scenario it has increased the cost of operations of many products. Aluminium prices too are increasing as it demands high level of electricity for smelting. The airlines business in countries such as India is too getting affected with costs rising. Air India has gone into the red and even Kingfisher Airlines is mulling closing down low-cost operations. Many other industries too have exited from their operations.

In all this, the OPEC is clearly not interested in lowering oil prices, as it is the mainstay of their economies, even though it functions counter to the interest of the rest of the world.  India has neither the leverage in influencing those decisions nor has it the capacity to look for cheaper energy alternatives as of now. Oil is India's largest import as Asia's third-largest economy imports 80 percent of its crude oil needs.

The flaw in the Indian energy policy, unlike that of the US, is that all energy prices are calculated with a high profitability in mind. While care for energy security has to be taken, it also has to be seen how the country could make it affordable and that energy does not become the main igniters of inflation and slowing down the economy as the latest core sector growth plummeting to 3.5 per cent indicates. The increasing number of bad bank loans is yet another indicator of the impact of high cost economy.

Undeniably, energy is adding to the complexity of the problem. Clearly, the policy has to be redrawn basing affordability of the people and industry as the sole criteria. Energy prices with high doses of tax were formulated in the 70s with a view to curbing energy consumption. However, this has not succeeded. At the same time, the policy has not been discarded as it helps the Government lower its fiscal deficit.

What next? Undoubtedly, there is need for a new policy, which should harp on the overall growth of the economy and evolve an energy policy that could lower the cost of all operations. It also needs to put less emphasis on high energy consumption or making it a status symbol as in Europe. If this reorientation is not undertaken, the country facing a difficult world situation would not be able to chart an independent course for its survival. The mantra has to be low energy cost and avoid its use where possible for India has an abundance of natural solar light, waiting to be tapped. ---INFA

 (Copyright, India News and Feature Alliance)

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