The budget cycle is upon us. The finance minister will have a strong deck of cards to play with when he addresses Parliament later this month. The economy has clocked up another year of robust growth; inflation is under wraps; interest rates are a concern but they have not yet strangulated credit growth; the balance of payments is healthy and the fiscal deficit is narrowing. The minister will no doubt compliment all those that have contributed to this positive story. He will, however, not mention the oil companies. For while they have indeed bolstered his exchequer by paying taxes far in excess of what he had anticipated, he knows that in consequence they are now in dire financial straits. He knows that the losses that these companies have racked up on account of the administrative cap on product prices and the ad valorem taxes levied on their transactions, and which through accounting jugglery he will keep outside his budget arithmetic, will have to be paid one day. He cannot in good conscience, therefore, thank the oil companies for contributing to his story. In failing to acknowledge the nexus between the parlous financial health of the oil companies and the robustness of the government’s exchequer, the FM is not only sidestepping the immediate costs that his successors will have to bear but also the consequential long-term financial implications. My concern stems from the thought that the public sector oil companies that are staring at a Rs 60,000 crore hole in their balance sheet can hardly be expected to look beyond the immediate. But that the two more serious concerns today — environmental degradation and energy security — can only be addressed if inter alia the companies manage the present without losing sight of the future.Environmental issues stare us in the face. We have justified reason for refusing to accept mandatory limits on GHG emissions. But we cannot ignore the fact that India would be amongst the worst impacted countries if global warming did alter the weather patterns and raise sea levels. We must ask, therefore, whether given their weakened financial position, the PSU oil companies will willy-nilly push air pollution off their priority agenda. The companies will, of course, say no but a subtle shift may well occur. The larger question and one which the FM should not sidestep, is what will be the implications of such a shift? What would be the financial consequences of managing worsening air pollution? As an aside, I must admit to concerns about the environmental consequences of the Nano. This is not because I doubt the product. In fact, I have great admiration for Ratan Tata’s achievement. I believe the Nano is a testament of India’s entrepreneurial and technical talent. And that it offers tangible hope to the desires of our aspirant middle class who look to trading up from a cycle to a four-wheeler through perhaps the intermediary of the scooter. I also believe the Tatas when they claim the car will meet the required emission norms. My concern flows from the picture of a people’s car crawling along our congested roads with (more than likely) adulterated fuel in its tanks. Energy security is our other major concern. We know that India will remain dependent on imported hydrocarbons for the foreseeable future. We also know that the sine qua non of sustainable development is an energy system based on non fossil fuels. Our challenge is to manage the short to medium term exposure to the vicissitudes of the international petroleum market and at the same time develop this alternative system. The problem is that our oil companies whose involvement is crucial may now be paying no more than lip service to this future. They simply do not have the resources to engage in relevant R&D; nor to experiment with the alternative infrastructures that would be required to commercialise new technologies. In this latter context, the experience of the US in displacing steam power with electric power is relevant. Thomas Edison illuminated lower Manhattan in 1882. The US industry did not, however, convert to electric power until the mid 1930s. This gap of almost five decades before the benefits of Edison’s revolutionary innovation could be fully realised was because of the nature of the industrial structure. US factories were not geared to deploy electric motors. They had to be redesigned and in many cases relocated before their steam and water turbine-based power systems could be replaced by electric motors. The process was slow and capital intensive. The same problem will confront us. Technology will not be the blocker. It will be the infrastructure. Our existing pipeline, terminal and network structure may well have to be totally overhauled before non-fossil fuel-based substitutes to gasoline and diesel can be bought to the consumer. The question the FM should ask is, to what extent will current policies slow the development of a non-fossil fuel future? What will be costs of prolonging our dependence on fossil fuels? Keynes (or was it Churchill interpreting Keynes) reportedly remarked that governments will eventually take the sensible decision but only after they have exhausted all other options. I wonder whether our government will prove Keynes wrong. Certainly, given the twists and turns in petroleum product pricing, there is little to suggest that the government is closing in on the sensible option. But who knows? The FM is among our most sensible politicians and he might well announce steps in his budget that facilitate the adoption of a mechanism wherein the burden of the current high price of oil is shared more equitably between the Central government (reduced excise taxes), the state government (reduced VAT), the consumers (a hike in prices) and the companies (a cap on their profitability). Were he to do that, it would revitalise the oil companies and the issues of environmental protection and energy security could be more effectively tackled.The writer is chairman, Shell Group in India
