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Decimal Digest
27 Jan 2016

How India Can Strategically Use Current Low Oil Prices to Wean Away from Fossil Fuel?

Current Situation:

  • The OPEC cartel, with an intention of gaining long term control of global oil supply, has been oversupplying the oil market for last eighteen months, resulting in 75% fall in the crude oil price from the peak. However, it must be understood that the intention of OPEC is to get North American producers out of business and get the prices up again in the medium term.
  • Additionally, at the same time, the intention of OPEC is to slow the transition to alternate modes of transportation technology, especially electric vehicles and Fuel Cell Vehicles.
  • For last many decades, India has been dependent on foreign oil, leading to huge current account deficits during the times of high oil prices and also high fiscal deficit as volatile petrol and diesel prices necessitated subsidy payments to control apparent domestic inflation.
  • For last two years or so, India has been witnessing, in line with global trends, aggressive bidding for solar and wind projects, leading to solar prices crashing below thermal coal power projects in recent months.
  • In recent years, India has been witnessing stratospheric increasing in pollution in its mega cities such as Delhi, Mumbai and Bangalore, due to vehicle pollution caused by burning of diesel.

Strategic Move to Benefit from Current Situation:

  • The domestic diesel prices in India have fallen by 25% since its mid 2014 peak. The government should consider reversing the price fall by hiking taxes, and use the windfall to make the excise duty, road tax and VAT on electric vehicles and fuel cell vehicles zero. Given that these taxes account for a very large proportion of vehicle prices, the electric vehicles can suddenly become cheaper by 20% to 40% depending on various factors. For price sensitive Indian buyers, this would be a huge incentive to move to electric vehicles en mass.A part of the windfall should also be used to extend the scope of current strategic initiative towards solar power. In fact, government should consider possibly covering all major highways with solar roofs, which will generate electricity and at the same time reduce the maintenance cost of roads, as the roof will protect the roads from unforgiving Indian sun and monsoon.
  • The demand for electric vehicles and fuel cell vehicles in India will encourage domestic and global car manufactures to further invest in the technology and bring the costs down in the medium term, so that after a decade or so, these new technologies can compete on their own strength without any need for subsidy.

In this fashion, it is possible that India can reduce its import of fossil fuel, reduce its pollution and maybe one day achieve self sufficiency in transport fuels, using innovative use of new technologies and fiscal measures.


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