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Tuesday, 21 January 2014 00:00
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Could convert to a long-term BoP one if not fixed

While the Maharashtra government cuts power tariffs by up to 20% in a move that looks suspiciously like a copy-cat of the power-cuts by AAP—Haryana followed the AAP just a few days ago—and the central government fiddles with LPG subsidies, a report by consulting firm McKinsey&Company suggests a lot worse is ahead. Indeed, given the report’s projections, the country’s current account deficit (CAD) is in danger of becoming structural if immediate action is not taken to fix things in the coal and oil sectors.

McKinsey’s maths is pretty simple. India’s energy demand of 700 million tonnes of oil equivalent (mtoe) in 2010 is likely to rise to 1,500 mtoe by 2030—within this, the demand for coal is set to rise from 283 mtoe to 750 mtoe, oil from 166 mtoe to 373 mtoe and gas from 53 mtoe to 113 mtoe. Were supplies to rise on a business-as-usual basis, according to McKinsey, energy imports will rise from around 30%of total consumption right now to 50%, making India one of the largest import-dependent countries in the world—the number for China is expected to be around 20% at that point in time.

The McKinsey solution—what it calls the energy independence scenario—is to dramatically raise domestic production of coal, oil and gas to keep imports down to a more manageable 15-20% of demand. This, however, is easier said than done since, while Coal India’s production stagnates, production needs to rise from 484 million tonnes in 2010 to 1,220 million by 2030; from 34 mtoe of oil in 2010 to 80 mtoe in 2030 and from 132 mmscmd of gas in 2010 to 390 mmscmd in 2030. Whether India achieves the numbers is a matter of chance, but there can be little doubt that there needs to be a sea-change in the manner in which the energy sector is tackled. Given how the diesel price hike, gradual as it is, has resulted in a dramatic slowing of demand, arbitrary hikes in subsidy levels are dangerous. Similarly, while it is fashionable to put price controls on natural gas, if this keeps E&P firms away from the sector, the largest impact will be seen on the current account deficit —apart from on industrial consumers who will, like they do now, have to buy imported LNG at an even higher price. In the case of coal, where the hike in production required is dramatic, it is clear India can no longer afford the luxury of a Coal India monopoly and, as has happened in the case of oil/gas, there is no option but to invite the best in the world to start mining coal. None of India’s political parties appear to have spent much thought on the matter. The McKinsey report suggests the time available is rapidly shrinking.


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