The Economic Survey, released by the government ahead of the Union Budget 2009, confirms marginal to low growth in the power and petroleum sector during fiscal 2008-09. Electricity generation registered a meager 2.7% growth, falling short of the targeted 9.1%, while the petroleum sector growth was a mixed bag with crude oil production registering a decline of 1.8%, natural gas production growing at 1.4% and refining sector growing at 3%. While the results are disappointing, these are not surprising given the stagnancy of reforms in the past few years as the government battled high energy prices, impact of the global meltdown and limitation of coalition politics.
The pleasant reading from the Economic Survey is the highlighting of the need for reforms in the energy and infrastructure sector, and many of the challenges and solutions that have been advocated by liberal thinkers is now a part of the recommendations of the Economic Survey.
Specific to the oil and gas sector the Survey seeks a policy response towards decontrol of petrol and diesel prices. This is endorsed by the upward revision in petrol and diesel prices by Rs 4 per litre and Rs 2 per litre respectively, announced on Wednesday.
In addition, the survey recommends a policy response system and a financial buffer for price rise above the oil equivalent price of $80 per barrel. The recommendation is to reform the existing arrangements of LPG subsidy to maximum 6-8 cylinders per household per annum and phasing out kerosene supply subsidy by ensuring that every household without electricity and LPG connection has a solar cooker and a solar lantern. This highlights the need to bring renewable energy as a solution to replace fuel subsidy. Of significant implication is the statement to offer old oil fields to private sector for improving/ enhancing oil recovery, which is a much required initiative to optimise utilisation of scarce national resource, along side increased impetus towards exploration and production activities.
The Economic Survey recognises the need to amend The Coal Nationalisation Act, thereby paving way for the private sector entry into coal mining and an amendment in The Atomic Energy Act, thereby permitting private and foreign (up to 49%) participation in nuclear power sector. These reforms are essential to augment the per capita power availability per annum from the current 704 units to 1000 units by end of 2012.
The growth rate of 7% whilst pegged for the fiscal year 2010 has the backdrop of a somber investment climate for the energy and infrastructure sector. Two world-class energy projects ie the Krishna Godavari D-6 gas production and the Cairn Rajasthan oil field can materially improve domestic production of natural gas and crude oil in the year 2009-10.
These projects illustrate the fact that the energy sector not only has the ability to propel economic growth, create jobs, reduce energy deficit but also generate significant revenues for the exchequer. The D-6 KG production alone is expected to contribute (royalty and profit petroleum) over its life cycle approximately Rs 1,400 billion which is three times the collection from levy of fringe benefit tax (FBT) and securities transaction tax (STT) since 2004-05 till date.
The challenges and the policy response is well articulated in the Economic Survey, and it remains now to be seen what fiscal and policy thrust is announced on the day of the Union Budget by the finance minister, especially towards the energy and infrastructure sector.
The writer is Partner and Leader, Energy and Infrastructure Practice, BMR Advisors