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6 April 2021, Gateway House

India’s counter-productive energy decisions

Retrospective taxes. Asking OPEC to reduce production. Raising oil prices at the pump. India’s perplexing actions on energy seem designed to defeat the Modi government’s declared goals of disinvestment of the public sector and welcoming foreign capital.

Senior Fellow, Energy, Investment and Connectivity

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India is set to join an illustrious club, one which counts Argentina and Venezuela as members: countries that have suffered the ignominy of having their overseas assets seized for dishonouring their financial dues. While Argentina[1] and Venezuela[2] have had these seizures due to unpaid debts, India is in a similar situation because of its refusal to honour an award by an arbitration tribunal.

Cairn Energy, U.K., plans to bring lawsuits in the U.S. and elsewhere to seize Indian assets to recover the $1.2 billion that the Indian government owes it[3] – dues from an award given in its favour against the retrospective tax that was levied on the parent Cairn Energy for the sale of its shares in Cairn India to Vedanta in 2011. The offending litigation was introduced a year later in 2012, giving the Income Tax department the power to tax such deals. Cairn went to arbitration – where the retrospective tax was ruled unfair by the arbitration tribunal. However, the Indian government is unwilling to honour the award, and will appeal it. This ill-informed decision, made in a ministry, has resulted in Cairn’s decision to target assets of the Indian government.

This perplexing action seems to be designed to defeat the Modi government’s declared goals of disinvestment of the public sector (including an oil company) and bringing in foreign capital, including in India’s energy sector. Investors like predictable regulation and rule of law. Laws which are changed retrospectively have no sanctity. Neither does a government which dishonours its promise.

This is not the only counter-productive decision on energy that India has recently made. As crude oil prices recover to their pre-pandemic levels, India’s strategy to deal with expensive oil is to urge OPEC to raise oil production to keep prices down. If only. Not only was this call ignored, but the Saudi energy minster rubbed it in and urged India to use the oil reserves it had built up in 2020 when prices were low[4]. There’s a parallel to Aesop’s fable of the Ant and the Grasshopper. The grasshopper wasted the summer singing while the ant worked, and was told to dance when it asked for the ant’s help in the winter. India wasted the summer of low oil prices – and finds itself in the same position as the grasshopper.

Appealing to OPEC to increase production is an idea straight from the 1970s. India’s planners need to start seeing oil prices for what they are – a signal to the market, not a tax paid to producers. Fresh capital will be drawn to oil exploration only if the price of oil is ‘high’ enough to make it viable. High prices are what made the U.S. shale oil a viable prospect, not appeals to oil companies to invest.

Piling up the shame, was the government’s decision to maintain its very high taxes on oil – which have pushed the price of petrol to nearly Rs 100/liter is some Indian cities, an all-time high. In early 2020, when crude oil prices crashed, the government kept retail prices flat and mopped up the excess in form of higher taxes. Even as the price of crude has recovered, the government has not scaled back its share, hurting consumers at a time of economic distress.

Can India get its energy markets right? There are some things it can do.

First, don’t appeal the Cairn award, pay up. Welcome foreign investors back.

With this virtuous deed in hand, go forth and invest in overseas oil production – but through public markets, not by buying oil fields. Large oil fields are not available at a time or place of India’s choosing, but shares of publicly listed companies can be picked up at any time.

Use the windfall income from petrol and diesel taxes wisely. Oil producers like Norway and Saudi Arabia have invested their oil wealth in non-oil industries – because they will suffer if oil prices fall. India is on the other side of this trade – it has nothing to worry if oil price is low but will suffer if the oil price is high – so it should invest in oil-producing companies whenever oil prices are low. For instance, Saudi Aramco, ExxonMobil and Rosneft are all listed companies – and pay regular dividends. An investment in a basket of such companies will yield higher dividend income when oil prices rise, softening the blow. India has some of the highest taxes worldwide on petrol and diesel. A small part of that cash can be used to provide some protection to the Indian customer, who is paying these taxes.

Lastly, save the Indian consumer, already drained by COVID’s fall-out, from hurting further – reduce taxes on diesel and petrol to pre-COVID levels. The government has enjoyed a windfall from oil taxes for a year; now it must stop being greedy.

Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.

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