Flashback to the period 1994 to 1998. The government sets up a committee to deliberate on the liberalisation of the petroleum sector. This committee is referred to as the ‘R’ (Reforms) Group. It is chaired by the secretary of petroleum, and comprises Indian industry’s elite, including Mukesh Ambani, Aditya Birla and the chairmen of the major public sector companies—Indian Oil, ONGC and Gail. The terms of reference of the committee are unambiguous. The sector needs to be unshackled from government control. Competition should be encouraged and the market must replace the bureaucracy as the core determinant of prices and resource allocation. The committee should recommend the steps to achieve this end, but in doing so, it should keep in mind the political constraints.

The committee deliberates for over a year before it proposes a three-phased deregulation—a ‘soft landing’. First, exploration and production must be thrown open to private participation. Thereafter, the limits on investment in refining and distribution should be removed. And finally, private companies should be permitted to market transportation fuels. In this final phase, the administered pricing mechanism (APM) should be replaced by market-determined pricing, and Indian subsidies on LPG and kerosene should be either abolished or, if continued, paid out directly from the government Budget rather than through the coffers of the oil companies. The report proposes that these three phases be implemented no later than April 1, 2002. The report is presented to the government sometime in 1996, and the bulk of its recommendations are implemented on April 1, 2002.

Fast forward to the present. The Gazette notification stands unaltered. The private sector does indeed have access to EP, refining and marketing. The APM remains abolished, and India’s public sector companies have formal autonomy to operate outside the ambit of bureaucratic control. This is the de jure current situation. The de facto reality is, however, radically different. Competition is minimal. The public sector continues to dominate the sector. Prices are not set by the market, the government dictates them. Subsidies on LPG and kerosene are still in existence, and the oil companies continue to bear the burden. The sector has, in short, been stealthily re-regulated.

The implications of this disconnect between the de jure policy and the de facto reality are far-reaching and serious. At a quantifiably tangible level, the disconnect is hurting the financial health of oil companies. This is because the administered prices of petroleum products are lower than the market cost of producing them. The oil companies are consequently hemorrhaging cash. At a less specific level, the disconnect is diluting the efficiency gains to be derived from competition, and it is undermining the capability of companies to fund R&D for clean technology and renewables. Competition is being throttled by the policy skew in favour of the PSUs. As a result, private companies have been compelled to reorient their investment and marketing plans.

Reliance has, for instance, recently converted its refineries into an export oriented unit (EOU). This means that they are now committed to generating more revenues through exports than through domestic sales. The decision makes economic sense for Reliance. The company captures the relatively high international margins, and by minimising domestic sales, it mitigates its local market losses. Also, the company benefits from the duty concessions proffered to EOUs. It makes sense for Reliance.

It may not, however, make sense for India. For it could lead to a situation where, despite having surplus refining capacity, the country may well be compelled to import relatively more expensive petroleum products.

International petroleum companies are amongst the biggest investors in clean technology and renewable energy. Indian companies should also be making a comparable effort. Unfortunately, this is not the case. The reasons may be several, but one must be their strained balance sheet. I imagine that given current conditions, the management is focused on cost-cutting to reduce losses rather than on the development of clean technology or R&D on biofuels, wind and solar energy sources.

At a deeper, perhaps somewhat philosophical level, the re-regulation of the petroleum sector throws up questions on the sanctity of the institutions of decision-making. After all, the ‘R’ group report was not a casual exercise. It involved the executive and the legislative arms of the government. It passed parliamentary scrutiny and was endorsed by the Union Cabinet. The policy pronouncements were made after extensive debate, and it was on the back of these pronouncements that international and domestic investors planned their strategy and tactics. To have it then so summarily bypassed suggests an erosion in the nature of the relationship between the different organs of our government. Everyone knows, of course, the reasons why the ‘R’ group recommendations have been bypassed. It is because politicians fear a voter backlash to high prices. They see this as good reason for sublimating economic logic and institutional propriety to populist irrationalism. But is that reason enough to ignore the Solomonesque forewarning 3,000 years back “where there is no vision, the people perish” or Churchill’s relatively more recent comment that “the era of procrastination” will inevitably give way to “a period of consequences”?

—The author is chairman of Shell Group in India. These are his personal views