The Hindu Business Line : Perpetuating petroleum dependency

Any government with the long-term economic interests of the nation in mind would have considered the rise in crude oil prices as the right opportunity to give the green fuel sector a boost.

Is the reduction in petroleum prices in broader national interest?

Sharad Joshi

Crude oil prices have remained highly volatile over the past year or so. After skyrocketing to $140 a barrel, they have plummeted to around $40 a barrel, thanks to global recession. With this, the Government, which has been steadfastly pursuing a policy of subsidising fuel prices all these while, was forced to bring down the retail prices of petrol and diesel. Though this seems to be an attempt to appease the urban affluent class, it has also lead to a wider debate: Is the reduction in prices in the broader national interests?

The country imports nearly 75 per cent of its crude oil requirements and pays out foreign exchange that it can ill-afford. Government policies, in respect of this precious and scarce commodity, have historically been, to put it mildly, bizarre.

The colonial British rulers were conscious of their imperial policies vis-À-vis the petrol-producing countries and tried their best to minimise the use of hydrocarbons. The British introduced public transport system in the country. Their main emphasis was on building up an extensive railway network.

Only a few maharajahs and relatively affluent Indian gentry owned and drove cars. It did not fit into the imperial policy to allocate petroleum for use in the colonies. The British economised on hydrocarbons probably because there was no alternative. Fortunately for India, the consequence was that, at the dawn of Independence, it had one of the world’s largest and fairly efficient railway networks.

Policy of oil subsidy

The brown Sahibs who took over from the colonial rulers were closer to the gentry that used private automobiles before Independence and had no particular inclination to patronise the railways. Mahatma Gandhi’s insistence on travelling third class was a difficult act to follow for his disciples. The rulers of independent India had no inhibitions about importing crude oil from West Asia. Their thirst, particularly, for West Asian oil was later on to express itself in the form of the “food for oil” scandal in Iraq.

One of the early disasters of Nehruvian socialist planning with emphasis on heavy industry was an over-production of cement. S. K. Patil, in his autobiography, gave a hilarious account of how the States and the local authorities were persuaded to go in for cement concrete roads in preference to tar roads.

In the early decades after Independence, India had only two or three models of cars, which were manufactured by families that were close to the Congress leadership. India became a country of poorly maintained cement concrete roads and ramshackle cars.

Since the interests of the car manufacturers and car owners were close to the heart of the rulers, the government followed, for long years, a policy of subsidising petrol and diesel. For the same reasons, cooking gas was also subsidised. The subsidies would have been politically expensive for the socialist pretensions of the rulers if kerosene, recognised as the poor man’s fuel, had been left to the free market forces.

The oil price swing

The period of fall in crude oil prices was preceded by several countries, particularly on the American continent, opting in a big way for green fuels, as much for their environmental advantage as for economic reasons.

Brazil had gone ahead in the development of both bio-diesel and ethanol. Both the biofuels are of plant origin and can be used as a satisfactory blending material for diesel and petrol. Brazil permits use of bio-diesel to the extent of 40 per cent. The rise of this new technology has been a boon for the farm sector.

In the past year or so, the Government has had its hands full with huge volatility in oil prices and the clamour for green fuels. When crude prices kept rising, the government was forced to rethink its fuel subsidy policy. The subsidies were counter-productive, in any case.

They encouraged manufacture of inefficient engines, slovenly maintenance, poor driving and uneconomic deployment of cars. The government tried to postpone, as much as possible, the review of its policy with creative financial tools such as “oil bonds” that are issued to the oil marketing companies in partial compensation for the losses they incurred. Ultimately, it was forced to approve a 10 per cent increase in petrol prices. Any government with the long-term economic interests of the nation at heart would have considered the rise in crude oil prices as a God-sent opportunity for giving a boost to the green fuel sector. The predecessor NDA government had made a good beginning by authorising up to five per cent blending of petrol by ethanol. The UPA government blunted that initiative by pegging the price of ethanol at Rs 21.56 a litre, a good Rs 35 below the retail petrol price.

grow THE biofuel sector

That is not the end of the story. With the crude oil prices slumping to less than $40, the Government has now started reducing the fuel prices, in view of the fast approaching general elections.

This, again, is a highly inadvisable action. The consumer has got used to paying Rs 56 or so a litre. This is a great opportunity to build up the green fuel sector, which the Government had failed to do earlier. What was the great hurry to bring down the prices? The oil companies do not like the idea. Further, the farmers are unhappy that the promise that bio-diesel held out has withered away.

The Government will need to balance the interests of the car owners, on the one hand, and those of the petrol companies and the farmers, on the other. The engulfing recession should make the Government opt clearly for a policy of self-sufficiency.

Promotion of green fuels through encouragement of bio-diesel and ethanol production that would, in turn, reduce imports from West Asia, should be the cornerstone of this policy of self-sufficiency.

(The author is Founder, Shetkari Sanghatana and a Rajya Sabha MP.)

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