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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