External Deficit: Free up pricing and scrap state monopoly in coal.

If you leave aside government dissaving, leading to a huge savings-investment gap that manifests itself as the current account deficit (CAD), the biggest contributor to India's alarmingly large CAD is imported energy: oil worth over $150 billion, and coal worth $20 billion. There is urgent need to rationalise oil pricing, step up domestic output of coal, and more.

In the absence of political will to act on this front, our CAD could further worsen. The subsidy on diesel encourages fuel guzzling, thoroughly overextends government finances, misallocates subventions and jacks up the cost of funds economy-wide by distorting the credit markets.

The Centre has given its nod to raise retail diesel prices by tiny amounts (Rs 0.50 per litre), 1% of the going rates, for three months now.

But such snail-paced price revision is clearly too little too late, given the glaring imbalance on the external front. The subsidy is now reportedly well over Rs 10 per litre of diesel. To send the right price signals, we need to put paid to the diesel subsidy quickly.

Otherwise, a worsening CAD would further depreciate the rupee and needlessly bloat the oil import bill. A nominal duty on crude does also make ample sense. It would improve government finances quite significantly and reduce the fiscal deficit and government dissaving.

Also, we must boost exploration and production of domestic crude. CairnBSE -1.79 % India's Anil Agarwal says he can rev up oil output in Barmer, Rajasthan, to 5,00,000 barrels per day — or over 25 million tonnes per annum, more than ONGC's — and the Centre needs to fast-forward regulatory clearances for the new acreage.

Rising coal imports reflect policy failure on tapping India's own massive coal reserves.

Continuing with the present public sector monopoly over coal mining implies huge national costs. While the ongoing effort to prune the fiscal deficit will also contract the CAD, we need to see some resolute policy action on energy: reform pricing and exploit indigenous resources better.


Source : economictimes.indiatimes.com