The fuel crisis could be a wake-up call

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The fuel crisis could be a wake-up call

Tuesday, 26 October 2021 | Uttam Gupta

The fuel crisis could be a wake-up call

The Government should look for long-term solutions to correct the current situation of heavy reliance on imports and reduce these to 10-15 per cent

During 2014-15, Coal India Limited (CIL) — a public sector undertaking (PSU) — had produced 494 million tons (MT). This was a record 32 MT higher than during 2013-14 and higher than a cumulative increase of 31 MT in the previous 4 years. In 2015, this prompted Prime Minister Modi to set a target of 1500MT for 2019-20. Of this, 1000 MT was to come from CIL and remaining 500 MT from private firms.

During 2019-20, India produced around 730 MT with CIL contributing 685 MT. Forget the target, the production fell much short of the demand leading to 300 MT import in that year. In 2020-21, domestic output declined to 716 MT; courtesy, Covid-19. During the current year, even as the country struggles to get back to pre-COVID levels, a surge in demand (off-take during April-September 2021 was 308 MT — up from 255 MT during April-September 2020) has led to coal stock at most of the thermal power plants plummeting to dangerously low levels.

On October 7, 2021, plants accounting for 100,000 MW or over 40 per cent of the total coal-based capacity (233,000 MW) had less than two days stock. At present, the situation may not be on the edge but India continues to be vulnerable. 

Crude oil is another major source of energy. It is the primary raw material for making a range of petroleum products. In 2015, PM Narendra Modi had vowed to reduce imports by 10 per cent. Instead, imports increased to 83.5 per cent. As for natural gas — touted as fuel of the future being clean and environment friendly — the country imports 50 per cent of its requirement.

The international price of crude which had plummeted to a low of $20 per barrel in April, 2020 (due to the devastating effect of Corona pandemic on economies world-wide) is currently $85 per barrel. As a result, not only our oil import bill has zoomed, the consumers of petrol and diesel are being made to pay through their nose; a price of Rs 105 per liter and Rs 95 per litre, respectively, in Delhi is something that will not even cross our imagination until last year.       

As for natural gas, from October 1, 2021, on supplies from fields given to Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) on nomination basis as well as those given under given under the New Exploration and Licensing Policy or NELP, its price has increased from $1.79 per million British thermal unit (mBtu) to $2.9 per mBtu. This will rise to $5.93 per mBtu from April 1, 2022 and $7.65 per mBtu from October 1, 2022. The price of imported LNG (liquefied natural gas) in the spot market has gone up from around $6.5 per mBtu in April, 2021 to current $33 per mBtu.

To get a sense of how it will impact India, let us look at some numbers.

 All of the urea production of about 24 million tons (MT) per year is based on gas. Two-third of the requirement is met from domestic gas and remaining one-third from imported LNG. Out of imported gas, 50 per cent is sourced from the spot market (balance 50 per cent comes under long-term contract at fixed price). For every dollar hike in gas price, the production cost of urea increases by Rs 1,800 per ton (24 mBtuof gas is needed for a ton of urea).

Corresponding to the domestic price of $7.65 per mBtu or $6 increase over the existing price applied to 16 MT (2/3rd of 24 MT), the extra annual payment will be Rs 17,000 crore (1800x6x16). As for LNG (spot) $33 per mBtu, increase of $26.5 over existing price applied to 4 MT (1/2 of 8 MT) will impose additional annual burden of Rs 19,000 crore (1800x26.5x4). Thus, the total impact will be about Rs 36,000 crore.

India imports large quantities of urea; about 10 MT (2020-21) to supplement domestic supply for meeting the demand. During the current year, it is paying $500 per ton which is $200 per ton more than last year. This will result in extra outgo of Rs 15,000 crore taking the total additional liability on urea to Rs 51,000 crore.

Under the present controlled regime, the maximum retail price (MRP) of urea is controlled at a low level unrelated to the cost of production/ import and distribution; the difference is reimbursed to the manufacturer or importer as subsidy. Whenever, the price of gas or landed cost of imported urea goes up, the resulting additional cost is paid as a subsidy to the manufacturer/importer. So, all of Rs 51,000 crore will be paid from the Union Budget.

The global fuel crisis has also led to steep increase in the prices of phosphate and potash fertilizers as well as raw materials used in their production. The price of imported di-ammonium phosphate (DAP) — most popular complex/phosphate fertilizer — is $630 per ton during the current year — $300 more than last year. Phosphoric acid used in production of DAP is around $1000 per ton - up by $375; ammonia also used in the making of DAP is US$670 per ton — higher by $470. The price of muriate of potash (MOP) at $400 per ton is higher $170.

The Government has already notified steep increase in subsidy on these fertilizers (22 grades in all) to compensate for the cost hikes and ensure that the farmers continue to pay the same price as last year. This will add to the subsidy bill by at least 30,000 crore - in addition to Rs 51,000 crore extra on urea.

It will also have to shell out gargantuan sums by way of subsidy on food due to higher MSP to farmers and increase in transportation cost besides the States having to spend more on power subsidy as they continue to provide heavily subsidized or even free power to households and farmers - no matter what the cost is.

During 2021-22, a very liberal fiscal deficit target — 6.8 percent of GDP (Rs 1500,000 crore in absolute terms) — has given leeway to the Government pay for higher subsidy on fertilizers and food. But, sooner than later, it has to get back to fiscal tightening and rein in subsidies. At that stage, things could blow up leading to farmers and consumers pay more or manufacturers/importers/agencies squeezed due to delayed payments and short payments or a deadly cocktail of all.

The current fuel crisis should be taken as a wake-up call. The Government should look for long-term solutions to correct the current situation of heavy reliance on import — Crude oil: 83.5 per cent; Gas: 50 per cent; Potash: 100 per cent; Phosphate: 90 per cent; Urea: 30 percent; Coal: 30 per cent. We should aim at reducing it to no more than 10-15 per cent in all these areas. Till this is done, India will continue to pay a heavy price in terms of escalating import bill, ballooning subsidies, unsustainable fiscal deficit, high inflation etc. 

(The writer is a policy analyst. The views expressed are personal.)


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