Energy reform is being held hostage to Cong's Rahul dream

Suddenly, the Prime Minister’s Office (PMO) has become a beehive of activity. A committee headed by Manmohan Singh’s Principal Secretary Pulok Chatterji - who is Sonia Gandhi’s man in the PMO - is supposed to sort out all the problems faced by the power sector in 90 days and report to the PM.

This is the principal outcome of a meeting big business leaders in the power sector - from Ratan Tata to Anil Ambani - had with Manmohan Singh on 18 January on the sector’s woes.

The best thing that can be said about the meeting is that it has identified energy as the key area for reform and policy action. This is why everybody from the PM to the finance minister, the power minister, the coal minister, the environment minister and the deputy chairman of the Planning Commission was in attendance on Wednesday.

The bad thing is that all this flurry of activity will amount to little without a political decision on one simple issue: freeing energy prices. It is the one solution that will work, but it is the one solution the UPA has been running away from for nearly eight long years.

In fact, in all of Thursday’s news reportage on the PMO meeting, pricing reform is conspicuous by its absence. The only context in which pricing is mentioned is one where the industry talks of high coal prices. In fact, industry wants a counter-reform to bring coal prices down by shutting Coal India’s market-based e-auctions.

Whether it is coal or power or oil, the UPA has simply tried to duck the issue by postponing decisions in the cause of political expediency. Even the small freedom given to oil companies to raise petrol prices has been withdrawn to allow the Congress to do better in the Uttar Pradesh elections, where Rahul baba is trying to win his spurs.

The consequences are there for all to see. For the first time ever, we have the ridiculous situation where petrol (priced at Rs 70-plus in Mumbai) will give the oil marketing companies another Rs 5,000 crore in losses, even while diesel (priced much lower at Rs 45-plus) will give them a nightmarish Rs 37,719 crore bottomline hit, according to the Petroleum Planning and Analysis Cell. Overall, the under-recoveries (losses) of the oil sector will top Rs 1,40,000 crore in 2011-12. The oil companies are losing Rs 427 crore a day.

If the government is willing to let oil companies lose Rs 5,000 crore just to give Rahul baba a leg up in Uttar Pradesh by holding the prices of petrol (the rich man’s fuel) for three months, it is difficult to see how the government is going to solve the much larger problems in coal and power - all of which ultimately relate to passing on costs and pricing freedom.

The UPA’s real failure has always been this: it has used bad political reasoning to pursue bad economic policies.

In UPA-1, fuel prices were raised sparingly because of the CPI(M). In UPA-2, it is the Trinamool Congress and the Congress party’s efforts to give Rahul’s electoral fortunes a boost that are destroying the energy sector.

The doubtful element in the current situation is that the PM has chosen the most complex of sectors to solve first when the oil sector’s woes are infinitely easier to deal with.

The power sector’s woes range from costly coal to inadequate supplies, from slow environmental clearances to Coal India’s inability to rein in costs as a public sector monopoly, from the low tariff agreements that promoters signed with power distributors to the latter’s inability to pay current power producers their dues.

The solutions lie in increasing coal production (by opening up coal mining, increasing investments and freeing pricing) and raising electricity prices (so that the increased coal and other costs can be paid for). But none of that is forthcoming by way of policy change. Coal India, far from being allowed to speed up investments in expanding output, is being asked to bankroll the government’s fiscal deficit.

The fundamental problem in the energy sector is that India needs huge investments in new coal mines, new power plants and new oil discoveries and refineries.

None of this will happen if the prices fetched are below remunerative levels. It is easy to say that energy must be subsidised - but the budget is already busted and there is no more money to throw around to rescue the energy sector.

The UPA’s biggest challenge is to fix the energy sector before it goes completely broke.

Between power sector losses (over Rs 1,00,000 crore) and oil companies’ under-recoveries (over Rs 1,40,000 crore), we have a problem that dwarfs the expected food and fertiliser subsidy bills by a wide margin (Rs 1,60,000 crore put together this year). Since food and fertiliser subsidies are allegedly about feeding the poor, we are essentially robbing the poor by subsidising the energy sector even more extravagantly.

The power sector’s losses are so worrisome that banks have stopped lending to it. Bad loans to power can sink the banking sector.

Sorting this mess out means pricing freedom to the energy sector. The sooner it’s done, the easier everything else will be to fix.

It will lead to short-term cost pressures and inflation, but in the long-term it is the only option. Without pricing reform, we are going to have permanent inflation driven either by energy shortages or fiscal overspending on subsidies or both.