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India should keep election politics out of energy policy

The best solutions need long-term continuity with cross-party consensus

| India
New Delhi's message to oil producers: Do not kill the goose that lays the golden egg.   © Reuters

The 30% slide in international crude oil prices from four-year highs notched in early October could well benefit the chances of Prime Minister Narendra Modi's ruling Bharatiya Janata Party in India's general elections, to be held in the spring.

In one of the world's largest economies, with a burgeoning urban middle class, pump prices can quickly become a hot-button issue, especially if they hit historic highs, as happened early last year.

The burden of transportation cost inflation on the man on the city street is played to the hilt by the media and is easily politicized, with the ruling and opposition parties trading barbs. The effect is amplified in an election year.

The Modi government probably faced more heat than usual over last year's spike in petrol and diesel prices because it had eliminated diesel subsidies shortly after coming to power in 2014 and proceeded to raise taxes on transportation fuels several times over 2014-2016. That resulted in pump prices hitting all-time highs in rupee terms in Indian cities of 91.20 rupees ($1.22) per liter for petrol and 80.10 rupees per liter for diesel though international crude prices had only touched a four-year peak.

The central government finally caved in to public and political pressure in early October, whittling down the excise tax on petrol and diesel by 1.50 rupees (2 cents) per liter from 19.48 rupees and 15.33 rupees per liter respectively. The country's public-sector refiners were asked to cut prices by another 1 rupee per liter, out of their pockets. It was a tough decision for the government and forcing the refiners to share some of the burden was far from ideal. But at least the government did not resort to bringing back state subsidies, which would have been a more regressive step.

The BJP may indeed have the tailwind of lower oil prices in 2019 compared with 2018 as it seeks the voters' mandate for a second term in the central government. But hoping for international crude prices to remain low is not a strategy.

Brent could bounce back from the current levels of $50 per barrel. OPEC producers and their non-OPEC allies have begun to restrain production by a collective 1.2 million barrels per day starting from Jan. 1, with the aim of tightening supply and pushing crude prices higher.

A breakthrough in the U.S.-China trade dispute could quickly turn around investor sentiment and cause oil demand growth projections to be revised upward, propping crude prices.

The U.S. Federal Reserve could step back from its aggressive interest rate hike cycle, easing the pressure on emerging economies and prompting a rebound in the stock markets as well as crude. Fed Chairman Jerome Powell on Jan. 4 buoyed investor sentiment, saying that the central bank will be "patient" in deciding on further rate hikes, based on how the U.S. economy evolves.

As the pre-election political rhetoric in India rises in the coming months, it will be important for the ruling BJP government as well as the Congress, the main opposition party, to avoid engaging in oil price populism. Thankfully, the topic appears to have receded from the political arena in tandem with oil prices in recent weeks.

But managing the country's growing crude imports and foreign exchange outflows as well as domestic fuel pricing policies is only a facet of a comprehensive energy strategy India needs, not just for the next few months or years, but decades. By definition, that means a guiding philosophy that transcends petty political rivalry and a long-term plan with execution handed over like a baton from one government to the next over the years.

Government policies shaping a country's energy access, energy basket mix, environmental sustainability and security of supply are too crucial to be left to political whims or to be overturned by a change in the ruling party.

The current government earned respect within the country and internationally by opening a channel of communication with OPEC leaders and the Middle Eastern oil producers, from whom India gets the bulk of its crude needs, as crude prices raced up over the second and third quarter of 2018. New Delhi delivered a clear message to the producers: Do not kill the goose that lays the golden egg. A steep hike in oil prices, while benefiting the exporters, burdens the consumers and can constrain oil demand growth in major consuming countries, it said.

As the world's third largest oil consumer and crude importer spoke, OPEC listened. India needs to make the most of this momentum and establish a regular dialogue with the producers, irrespective of prevailing price levels.

A string of energy policy reforms initiated or accelerated by the Modi government will need to be sustained, irrespective of which political party or coalition takes over after the election. These include India's push for cleaner fuel rules to reduce harmful vehicular emissions, full deregulation of oil product prices, a boost in production and consumption of biofuels, ambitious plans to raise renewable energy's share in the power sector and lift electric vehicle sales targets. A rising India can ill afford to lose the momentum on such initiatives.

In particular, a future government must carry through to its culmination a complex scheme successfully implemented by the current administration to wind down the last of the country's fuel subsidies in liquefied petroleum gas (LPG) while ensuring that the cooking fuel remains affordable and is made accessible to the poorest households.

Ultimately, to reduce its dependency on oil and move toward a cleaner environment, India needs to radically rethink its transportation policy. It ought to look at introducing efficient and affordable mass transit systems with effective last-mile connections. Replacing internal combustion engine cars with electric vehicles may solve the oil-dependency and pollution problems, but not the traffic gridlocks that have become the bane of commuters' lives in India's metros. Such projects need a national vision and a meeting of the minds across the political spectrum even more than short- to medium-term energy policies.

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy sector.

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