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Indian government should scrap energy subsidies & raise energy efficiency says RK Pachauri, TERI

According to reports, the International Energy Agency has projected the possibility of oil prices reaching $150 per barrel by 2035. Oil price projections are fraught with uncertainties and complexities, which defy conventional analysis. It is entirely possible that the IEA’s projections will turn out to be off the mark.

But, fundamental changes in the global oil market suggest growing pressure on supply as a result of production capacity lagging behind quantity demanded.

Hence, while 2035 may not be the precise date by which prices hit $150, the trend will undoubtedly be upwards, leading perhaps to the spectre of four years ago with prices reaching $147 per barrel. The IEA’s prediction could very well occur earlier.

The Prime Minister, in his statement on New Year’s Eve, has rightly emphasised energy security as an important objective of development. This emphasis is timely and important. In a business-as-usual scenario developed through rigorous modeling by TERI, it has been projected that by 2031 India may be importing 750 million tonnes of oil and around 1,300 million tonnes of coal.

Such staggering levels of imports could run into serious physical constraints not only at the source of supply, but also in shipping internationally and port capacity and inland transportation within India.

Ideally, government policies and particularly real as well as relative prices of different forms of energy should reflect expected scarcity, so that market forces induce major improvements in the efficiency of energy use as well as the development of substitutes, thus reducing the expected dependence on imports of fossil fuels.

But given the enormous resistance to increase of energy prices, the government is unable to recover even operating costs of power supply and persists with heavy subsidies for oil products such as kerosene, LPG and diesel. It seems unthinkable, therefore, that prices would include some form of security premium to help moderate the increase in demand for imports.

Consequently, decisionmakers in business would not, in the immediate future, carry any part of the security burden, even as they may foresee serious difficulties ahead on account of India’s growing dependence on fossil fuels.

While global developments and concerns clearly suggest an energy future very different from business-as-usual, any analysis of the Indian scene suggests an approach by which energy security is made not only an important element of national policy, including rationalisation of energy prices, but also a part of corporate decision-making.

This is not something that is dictated by reasons of patriotism but an acceptance of the fact that energy prices cannot continue at levels below cost in India, and that globally prices of fossil fuels are projected to increase according to every credible study.

Besides, with India’s growing demand for imports, the day is not far when at the margin India may have a significant upward impact on global prices of fossil fuels. Finally, global trends indicate a shift to much higher levels of efficiency in energy use, which would be reflected in the prices of goods and services produced.

If India has to compete in the global market, it would be at a disadvantage if much of the country’s industrial sector remains lower than global benchmarks of energy efficiency. Enlightened business policy would, therefore, require assessment of global trends and drivers of change, and implementing actions that would give Indian firms a cost advantage today and minimise the risk of facing much higher energy costs in the future. Forward looking companies would base their policies on robust assessment of the energy future facing India and, therefore, every business entity in the country.

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