Oil’s well, what about water?

India Infoline News Service | Mumbai |

The recent announcements of the Government, followed by the subsequent rally in oil stocks fills my heart with great joy. Years ago, I started my career as an oil and gas sector analyst. In mid 90s, it was mandatory for every oil & gas analyst to write one chapter on benefits of deregulation. Every analyst had put a BUY on all the PSU refining and marketing companies.

The recent announcements of the Government, followed by the subsequent rally in oil stocks fills my heart with great joy. Years ago, I started my career as an oil and gas sector analyst. In mid 90s, it was mandatory for every oil & gas analyst to write one chapter on benefits of deregulation. Every analyst had put a BUY on all the PSU refining and marketing companies.


The arguments for the Buy report were -
  • Strong competitive position on account of depreciated refining assets and marketing infrastructure
  • Demand for end product is always going to exist and grow with rising population and economic growth
  • These companies were operating under the administrative price mechanism regime, which capped the profits, and everyone expected that deregulation would result in earnings expansion


A decade-and-a-half later, the analysts’ arguments remain the same as mentioned.

Deregulation of the sector remained more on paper as a result of which most investors lost patience and  ended up getting frustrated because of under-performance of PSU refining stocks.  Apart from brief periods of out-performance driven by either issuance of oil bonds or petrol price hikes or rumors of deregulation or strategic stake sale, the PSU refining stocks have under-performed the broad market indices. In the meantime, Reliance has come up and set the world’s largest refining capacity in a single location in Jamnagar. They are threatening to double that in the coming days. They also set up a distribution network, which ran into heavy weather because of losses. 

What is commendable is the bold decision of the government to raise kerosene and LPG prices. In spite of the Left and the Right (read BJP) coming together to protest and calling for bandhs across India, the Government is moving in the right direction.  For a long time, politicians depending on which side of the Lok Sabha they are sitting, argue on behalf of the aam aadmi and protest against price hikes. The aam aadmi does not drive cars / Scorpios/ Innovas and most people in hinterland do not even have a LPG connection.  Forget LPG, I am sure, the large section of population living below the poverty line, do not even have access to ration cards and hence subsidized kerosene. They burn firewood for cooking. I hope more research is done to support my hypothesis. These are excuses to keep prices artificially low. How many ration card holders buy the allotted kerosene? This highly subsidized kerosene invariably gets used for adulteration or for running two-wheelers and gensets in hinterland.


Subsidies distort consumption and can cause unrelated side effects. The declining water tables in the northern states are an outcome of free electricity and subsidized diesel; pumps are used for flooding fields with water, whether needed or not. If the farmer had to pay the correct price for water, diesel as well as electricity, then they will use it judiciously and carefully. Not many would be aware that roughly 2500 litres of water is needed to grow a kg of rice.

Some time ago, I met the owner of a drip irrigation company, and he said there is a demand for drip irrigation from countries in Africa as a solution to their power shortage problem.


This brings to the area where reforms are needed urgently – water. We are wasting water because it is free. Suppose we had to pay for water, then people start using water more carefully. All the high rises advertise Jacuzzis and plunge pools – where will they get water from? Tanker water is the norm and BMC water supply is the exception. When a person spends crores of rupees in Mumbai buying a flat, then he should be willing to pay for water also. Anyway, a hefty sum is paid every month to pay for  ‘maintenance charges,’ so an additional sum will not pinch the pocket.

The faster the government starts pricing water, the better it is. I was aghast to learn that drainage and water pipe line in Mumbai (Shanghai aspirant) are still remnants of the British Raj. Mumbai has expanded a lot since the days of the British Raj.

Reforms take place when there is no option left. Why blame politicians alone, everybody prefers status quo. The government is pushed to the brink and then is forced to take a decision.  India’s successful reforms, and the achievements of the current Prime Minister (the then Finance Minister) are lauded by everyone. But let us get the facts right. It was not as if the then Prime Minister desperately wanted reforms. The reason reforms happened was because there were no options left. They could have either ‘reformed’ or allowed India to become a basket case like our neighbor. Thankfully, saner counsel prevailed.

Some years ago, a gentleman from the World Bank rightly said – “Many of the wars of the 20th century were about oil, but wars of the 21st century will be over water."  We live in a world where the supply of water is static at best while the demand is racing faster than the population. The impact of climate change is also here for all to see. Water will sooner than later turn into a political, social and economic issue. Hopefully, we should see some ‘regulation’ to ensure that the taps don’t run dry. 


 

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