Recently, Dr Montek S. Ahluwalia observed that ‘8% growth in GDP can’t be guaranteed unless Indian product prices are linked to international energy prices’.
There can be no dis-agreement on this especially in case of energy where our import dependence is above 80%. But, who will do it and when?
Considering that all sources of energy supply have been under an administered/controlled price regime for decades, initiative has to come from Govt only. But, actions thus far fail to inspire!
Naphtha, fuel oil & LSHS (low sulphur heavy stock) are used as feedstock & fuel in making of fertilizers. Fertilizers mainly urea, DAP & other complex fertilizers are used by farmers for raising crop yield.
Under administered price regime (APR) – thru 80s & most of 90s – these were supplied at a ‘concessional’ price to fertilizer industry. Other industries were paying much higher.
Government also operated an Oil Pool Account (OPA). Surplus generated from sale of items like petrol, ATF etc was used to cross-subsidise supplies to fertilizers, kerosene, LPG.
Selling price of fertilizers were also ‘controlled’ and kept ‘low’. These prices moved (or did not) on the basis of what was politically feasible. These had no linkage whatsoever with cost.
Although P& K fertilizers were decontrolled in August, 1992, de facto they were not. Barring one month (Aug 25 – Sept 30, 1992), their MRPs were controlled all thru!
In April 1998, naphtha, fuel oil & LSHS were decontrolled. Oil PSUs were told to fix their prices on import parity (IMPP). Prices zoomed raising fertilizer production cost to prohibitive levels.
But, urea MRP remained un-altered!
International prices of rock phosphate, phosphoric acid, sulphur & potash (raw materials in making of P& K fertilizers) rose all along; yet MRPs of complex fertilizers were rarely adjusted.
Only from April, 2010 when nutrient based scheme (NBS) was put in place, producers got freedom to reflect increases in MRP. As a result, DAP, complexes & MOP prices have gone up 3-4 times.
With urea price remaining stuck, this has caused huge imbalance in prices and resultant deterioration in NPK use ratio. This has affected crop yield, soil health & environment.
Natural gas is another feedstock in fertilizer production. In 1991, a Committee under Dr Vijay Kelkar recommended linkage of its price with a basket of fuel oils. That was ignored.
However, based on recommendation of a Committee under Dr PL Shanker (Principal, ASCI, Hyderabad), from Oct,1997, the linkage was established @ 55% initially to be raised to 100% in steps.
Government intended to ‘fully’ decontrol price of gas in 2002. A decade down the lane, this has not happened. Meanwhile, the price has more that doubled to over $ 4 per mBtu.
The administered regime for petrol & diesel was dismantled in April 2002. Oil PSUs were then, told to fix their prices on IMPP. But, that remained on paper for 8 years.
In June 2010, petrol price was de-regulated. For diesel, Govt took some ‘baby’ steps in 2013 viz., direction to oil PSUs to increase price in small lots till under-recovery is fully eliminated.
The prices of LPG & kerosene continue to be controlled at low level. The excess of IMPP over this is filled thru subsidy from Govt & discount from upstream oil PSUs viz., ONGC/OIL.
A cap on subsidized LPG cylinders now at ‘9’ is cosmetic. Real action vide Dr Kelkar recommendation to trim subsidy by 25% in 2012-13 and balance 75% in following 2 years is no where in sight.
As regards kerosene, Dr Kelkar proposed only 33% reduction in subsidy that too by 2014-15. This would remain de-linked from import parity ad infinitum.
Like fertilizers, kerosene etc, power tariff for households and agriculture has all thru been kept at levels way behind cost of generation & distribution. In many states, this is supplied to farmers free of charge.
Costs have increased due to increase in cost of coal, increasing share of imported coal (that costs almost double than domestic), increase in gas price & use of imported LNG that costs 3-4 times more than domestic gas.
Majority of generating units – set up under MOU route – promptly transmit increase in fuel cost to DISCOMs/SEBs. Now, even IPPs (independent power producers) who committed to supply at ‘fixed rate’ under ICB have been allowed to pass on!
Since, DISCOMs/SEBs cannot increase tariff, they run in to huge losses. Eventually, Govt is forced to come to their rescue thru restructuring packages. In 2002, there was a bail out for Rs 40,000 crores & now another for over Rs 200,000 crores.
Looking at facts on ground, a sort of ‘duality’ in Government’s approach is clearly discernible. Thus, it promptly allows determination/fixation of prices of crude, naphtha, fuel oil, LSHS, gas/LNG, coal etc on import parity.
On the other hand, when it comes to pricing of end products viz fertilizers (urea, complex fertilizers, MOP), diesel, LPG, kerosene, power etc, it is ‘impervious’ to the need for linkage with rising costs of inputs that are used for their making.
And it is this ever widening gulf that has led to galloping subsidies on fertilizer, fuel & food now touching astronomical level of Rs 300,000 crores annually (US$ 54 billion). Ditto for mountain of losses of SEBs/DISCMs close to Rs 250,000 crores (US$ 45 billion).
All this in turn, undermines our fiscal consolidation efforts. How can Mr Chidambaram remain within the ‘Red lines’ he has drawn in regard to fiscal deficit viz., 4.8% for 2013-14 & a reduction of 0.6% annually for 3 years thereafter to reach 3% by 2016-17?
There is no use allowing things to dither first and then, bemoaning consequential fiscal imbalances. Financial engineering or postponing payments can only help up to a point. Govt can’t escape facing the situation head-on for too long.
Unless this ‘duality’ syndrome is addressed, we will only be ridiculing ourselves by talking of economic reforms. And, a high growth trajectory would remain a distant dream!