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Updated: May 19, 2014 23:41 IST

Study that fails to unravel energy-growth link

K. Subramanian
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THE POLITICAL ECONOMY OF ENERGY AND GROWTH: Edited by Najeeb Jung; Oxford University Press, YMCA Library Building, 1 Jai Singh Road, New Delhi-110001. Rs. 995
THE POLITICAL ECONOMY OF ENERGY AND GROWTH: Edited by Najeeb Jung; Oxford University Press, YMCA Library Building, 1 Jai Singh Road, New Delhi-110001. Rs. 995

Though this book carries a high sounding title — “The Political Economy of Energy and Growth” — it is not a treatise on growth-energy linkages. It is a festschrift in honour of Dr. Vijay Kelkar. The contributors have worked on energy related issues either as academics or as senior functionaries in the industry. What holds them together is the high esteem they have for him, especially for the innovative contributions made by him as a policymaker.

Indeed, as Mani Shankar Aiyar describes (chapter 12), Kelkar is “A Man for All Seasons.” After a brilliant academic career, he served in various Ministries and rose up the ladder to become the Secretary in the Ministry of Petroleum and, later, the Finance Secretary. He was Chairman of the 13 Finance Commission. He was entrusted with the report on fiscal consolidation issues. When gas pricing issues turned controversial, he was called upon to study them. It led to the submission of an interim report in January this year under the title: Roadmap for Reduction in import dependency in Hydrocarbon Sector by 2030. His early lecture titled “India’s Oil Policy in the Coming Century” delivered in 1996 created waves in academic and official circles. Most authors in this compilation make repeated reference to it and his other writings or lectures with awe.

Briefly, two of the most important contributions made by Kelkar are, (1) abolition of the administered price mechanism (APM) in December 1997; and (2) the introduction of “New Exploration Licensing Policy (NELP)” in 1998. By and large, all the authors lavish praise on those measures. However, after a lapse of more than two decades and with the benefit of the experience gained in implementing them, one may expect an analysis of the results of the reform measures and to what extent they have contributed to our energy security and in establishing an equitable and sustainable pricing-cum-distribution mechanism. In truth, the post-APM scenario is messy. The system is half-free and half-slave with the benefit of neither. And the NELP is in disarray. Issues relating to gas recovery and pricing have turned into national scandals.

Sadly, no author grapples with these issues though some make references in passing. Some papers refer to the complexities attached to the issues such as vested interests or lobbies, political compulsions, fiscal constraints, governance failures, populist policies, etc. The big picture is lost in the minutiae. Except Mani Shankar Aiyar, all the authors are pro-marketeers in orientation and grudgingly concede a role for the government. Energy is a highly capital-intensive and high-risk area. In emerging economies like India it is naive to expect private investment to play a role or expect competition (level playing ground!) among many players. Unfortunately, in the nineties, the new found zeal for “reforms” invaded the energy sector and Kelkar echoed it.

Though the book is divided into four sections with each section dealing with an area, there is no common focus. Each author deals with his area of specialisation and many lean on their earlier work or research done in The Energy and Resources Institute (TERI). Some are reworked older papers. Two chapters stand apart: one by Sanjiv Mishra on the “International Oil” and the other by Mani Shankar Aiyar giving an assessment of his interactions with Kelkar as his Minister.

Sanjiv Mishra’s narration captures the evolution of the industry over the years and its current predicament. The latest phase is marked by “financialisation” of oil as one of the commodities where the OPEC has lost control over pricing. “Oil price movements are driven by expectations instead of ground realities, adding thereby to the uncertainty and volatility in crude oil prices.”

Pachauri’s eulogy of Kelkar is overdone (chapter 2). He offers a descriptive account of the phasing out of APM and the work done by an inner group. It is difficult to agree with his conclusion that “phasing out has been of significance for promoting a competitive hydrocarbon industry sector in India and enabling a hydrocarbon market that provides a level playing field to private sector and rationalises prices for the domestic hydrocarbon industry.” How many new private sector entrants have joined the fray after the APM phase-out? He ignores the constant struggle between volatile import prices, the resultant “under-recoveries” and the fiscal burden it has thrown on the government.

There is a constant lament over subsidies. For instance Rita Nangia says, it is important for policymakers to find smart ways to protect the vulnerable groups by targeting subsidies directly to users, but at the same ensuring fiscal responsibility! Chapter 6 by three economists is a full scale study of ‘subsidy elimination with and without a global price shock.’ At the end of an elaborate and esoteric analysis, it recommends “a policy of gradual administered oil price adjustment compared to a policy of eliminating all oil subsidies and under-recoveries in one shot!”

Sir Bill Gammel of Cairn Energy provides (chapter 8) a detailed account of the oil exploration efforts by his group in Rajasthan. He narrates the new technologies and techniques adopted by them. However, it is surprising that his account makes no mention of their acquisition of Shell’s project in the region. Where Shell had failed after many years and abandoned it, Cairn took over and struck gold.

Given the growing importance attached to natural gas in our energy basket, it is natural that many authors deal with gas-related issues such as pricing, production sharing, etc. in Section IV. The NELP is the bedrock on which our exploration efforts depend. There are references to the inadequacies attached to the NELP framework. However, there is no incisive or rigorous study explaining the poor record. Since 1999, after nine rounds of auctions, the estimated commercial discoveries are 31. Of these 19 were declared by RIL and 8 by Gujarat State Petroleum Corporation (GSPC). Sadly, there is only one producing asset and that happens to be KG-D6 owned by Reliance! Two authors (Chapter 10) recommend some models drawn on the experience of countries like Malaysia, Singapore, etc. At this stage, it sounds rather pedantic. We have to clean up the current mess before we adopt an alternative model. The odds are heavily against it.

A report of the Oxford Institute for Energy prepared by two Indian economists (Auctions for Oil and Gas Exploration Leases in India: An Empirical Analysis, Anupama Sen and Tirthankar Chakravarty, OIES Paper: SP 30, December 2013) is a revealing study. It explains that the NELP regime led to a highly concentrated market in upstream acreages where a small number of firms hold the largest amounts of acreage. The stark reality is that the NELP, instead of bringing in a number of private players in a competitive arena, has resulted in acute concentration. Government is pitted against a single player. There are disputes over gas pricing, over rates of extraction (production) of gas and over ‘gold plating’ of expenditures, etc.

However well intentioned, the vision attached to the NELP has driven us into a blind corner. Only Aiyar has offered critical (caustic!) comments on the NELP and its failings. He has compared it with the experience of China which has surged ahead in the international market with huge corporations aided by state funding and investments overseas. He laments how his idea of an integrated oil agency to undertake such a role was sabotaged by the bureaucratic clique abetted by his own Secretary!

Energy is vital for economic development and wheels of development move on energy. The linkages are complex and fascinating. The structure of the global petroleum industry is complex and marked as much by geology and economics as by politics. There are limits to the operation of economic laws when politics takes over. In its adulation for market-oriented policies advocated by Dr. Kelkar, the book fails to unravel these relationships. It is a disappointing study.

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