The government’s premier think-tank Niti [National Institute for Transforming India] Aayog has firmed up the National Energy Policy [NEP] and the first draft will soon be made public.
An overarching objective of NEP is to bring about comprehensive energy sector reforms that could free up sectors such as coal, electricity and fertilizers of subsidies and price controls and help produce more power and make generation projects commercially viable for private companies. It lays out a clear roadmap for lowering subsidies on fertilizers and power by aligning their prices to the market.
The policy also seeks to improve the financial condition of power distribution companies [PDCs], which are presently bogged down by huge debt to make the sector profitable – in the medium to long term – by overhauling their entire structural and functional capacity and running them on commercial lines. They could either be privatized or run in private-public partnership mode.
Besides, the policy should focus on long-term strategy in the electricity sector to move towards renewable.
The policy reforms are being crafted in the backdrop of all stakeholders in the energy supply and use chain being denied the flexibility in regard to supply and pricing of their products. Gas and coal are the prime source of energy especially in power and fertilizers which consume bulk of their supplies. In fertilizers, whereas about 80% of urea production is based on gas, in power, nearly 60% of generation is on coal and around 10% on gas [rest is on renewable sources].
Who gets how much of gas/coal is determined by the linkage committee in the respective ministries. The price is also administratively determined. For all of domestic gas [except where extant supply agreement does not require government approval], the price is arrived on the basis of formula using prices prevailing in UK, USA, Canada and Russia as benchmark. In case of coal wherein, over 80% of the requirement is met by Coal India Limited [CIL] – a central government undertaking – its price is also regulated.
In fertilizers, the Government of India [GOI] directly controls the maximum retail price [MRP] of urea at a low level and compensates manufacturers for excess of cost of production and distribution over this as subsidy. Any increase in price of inputs including gas used in fertilizer making which leads to higher production cost has to be paid by GOI as higher subsidy as MRP cannot be raised.
In power, producers/generators are allowed to pass on increase in cost of fuel [read coal, gas etc] by way of higher price/tariff charged from state electricity boards [SEBs]/power distribution companies [PDCs]. But, the latter are not allowed to pass on the hike to users as the tariff is fixed by state governments on supplies to households and farmers [they consume bulk of the supplies] at an artificially low level.
The tariff charged from these segments being substantially lower than the cost of procurement and distribution, SEBs/PDCs incur huge losses which are eventually subsidized from the state budget under restructuring packages sanctioned from time to time [three packages viz. 2002/2012/ 2015 have already been granted].
Ballooning subsidies cause stress on respective budgets of central and states. These undermine fiscal consolidation efforts and have much wider implications for the economy by way of spurring inflation, increase in interest rate, credit downgrade and flow of foreign capital. Therefore, the government is keen to rein in subsidies too. This leads to a deadly cocktail.
The relentless pursuit by the government to keep price of fertilizers and power to end users low on one hand and rein in subsidy on the other leads to flawed/distorted policy decisions. It has led to continued control on price of fuel [gas and coal] which seriously constrains the ability of exploration and production companies to undertake required investment and in turn, boost indigenous supply.
It also hurts fertilizer producers as the clamor to save on subsidy prompts the government to cut corners in pricing [subsidy is paid to them under new pricing scheme (NPS)] and delayed payments resulting in avoidable loss to them. This in turn, has affected investment and growth of the industry. Even worse, existing players have left the industry [e.g. exit of Tata Chemicals last year].
SEBs/PDCs are perhaps, the worst victims of states obsession with concessional tariff on supplies to farmers [free in some] and households. The persistent losses had led to astronomical level of debt – Rs 430,000 crore as on September, 2015. Their financial health was in dire straits to a point whereby they were not even able to pay for purchase of power from producers/generators.
The Ujwal DISCOM Assurance Yojana [UDAY] launched in 2015 has sought to address their legacy debt by literally extinguishing 75% of it and significantly reducing interest burden on balance 25% [via issue of low interest bearing bonds]. It focuses on steps to improve operational efficiency and lowering the cost of purchased power. But, the ground remains fertile for losses/debt to surge again!
Without doubt thus, the genesis of the problem across sectors lies in continued controls – overriding thrust being on keeping prices low and ensuring adequate supplies at these prices. This scenario is inherently not sustainable. In this backdrop, Niti Aayog’s proposal for removing control on fertilizers and power and aligning their prices with that of market is very apt and timely.
It will give required freedom to producers to adjust prices in line with changing cost scenario. It will boost their resource generation capabilities and help them give their best for advancing India in the direction of enhancing energy and fertilizer security. It will also go a long way in drastically reducing subsidies and help government pursuing its fiscal consolidation agenda.
But, pursuing reforms on these lines is bound to face a big hurdle at the political level. In the past, similar recommendations were not acted upon by the establishments. Whether things will be different this time, one can only wait and watch.