LNG imports can end the east’s exclusion

Energy diplomacy is usually viewed as a means by which one country can achieve energy security in conjunction with other countries. But it can have another beneficial outcome: it can end regional disparity within India, which has been a drag on economic growth and has created numerous social tensions.

The new Modi government has the opportunity to work towards this outcome, specifically through the instrument of imported gas.

All that the Bharatiya Janata Party-helmed government at the centre has to do is redirect to the east and north-east some of the infrastructure planned for receiving LNG imports from other parts of the country. These areas have been deprived of industrialisation and economic growth for decades. If gas is made available, along with special packages—that can include tax breaks and easier land acquisition—to foster customers, it will help to re-industrialise the east.

India is currently preparing the infrastructure required to increase the imports of liquefied natural gas (LNG). This has become inevitable after natural gas output from the KG-D6 wells of Reliance Industries Ltd, off the Andhra Pradesh coast, dropped sharply, forcing gas-based power generating and fertiliser manufacturing units across several states to import LNG.

In addition, with an expected renewed annual economic growth rate of 6%, India will have to import larger quantities of LNG every year to meet the concurrent rising demand. The annual demand for natural gas is expected to touch 746 mmscmd (million metric standard cubic metres per day) by 2030 and availability will be only 260 mmscmd. The imports will have to continue because domestic production as well as gas carried through proposed transnational pipelines—an estimated 30 mmscmd every year after 2017-18—will not meet the projected demand.¹

However, before India can begin importing LNG, the country needs specific import-enabling infrastructure on the ground. This includes re-gassification and storage facilities, as well as pipelines that can transport gas to end-users. At present, most of the pipelines and re-gas facilities, both public and private sector, are located in the western and northern regions.

Consequently, consuming industries—power generation, fertiliser manufacturing, steel mills, and petrochemicals complexes—have also come up largely along the western coast corridor or along the gas distribution pipeline in the north.

It has left the east and north-eastern states completely devoid of a pipeline grid and re-gas facilities. Even the gas extracted—178.3 billion cubic feet during 2013-14—from the KG-D6 wells, is transported through an east-west pipeline to feed west-based industries, with no gas left for industrial consumers in south India. ²

According to an August 2011 report of the Saumitra Chaudhuri Committee on Pooling Gas Prices, the western and northern regions together account for 79% of the country’s natural gas consumption, with only 60% of the country’s total pipeline infrastructure in the area.³ The eastern region has neither pipelines nor does it consume any natural gas. The north-east has some historical gas consumption based on yields from Assam’s on-shore Duliajan fields.

These regional imbalances are a product of the political expediency of successive governments in the past. The central government’s policies have historically deliberately favoured the development of the western and northern regions, at the cost of the eastern region.

The pernicious “freight equalisation scheme” of 1952 eroded the eastern region’s vast engineering industry base. Under this scheme, commodities such as coal and steel, which gave the eastern region a competitive advantage, were made available to the western and other zones at the same price as the source.

The freight equalisation scheme ensured that private capital found greater incentive in setting up production facilities closer to trade centres rather than near the source of the raw material. It resulted in the mass-scale closure during the 1960s and 1970s of hundreds of engineering units in West Bengal, in the large as well as small sector.

However, the same equalisation scheme was not extended to commodities in which the western zone had a competitive advantage, such as raw cotton or oilseeds. An inter-ministerial committee set up in 1975 rejected a demand from east-based cotton mills for freight equalisation on cotton, forcing many mills to shut down.

In addition, licensing was used as a tool to divert industries from the eastern zone to the western and northern zones.⁴ There was some merit in pursuing such a policy: given the east’s historical predominant industrial base, the governments had to frame policies to ensure balanced development. However, the policies soon became a tool for favouring one region over another.

It has often been claimed that labour militancy and the long presence of the Left Front-led government led to the decline of the east’s dominant industrial base. There might be some truth in that view, but the Left Front came to power in West Bengal only in 1977, by which time the freight equalisation scheme was in existence for 25 years. Besides, labour unrest is not limited to the east: as a result of the months-long strike by textile mill workers in Mumbai, many composite mills also went into a decline or had to be shut down.

The BJP government now has an opportunity to correct this historical error. The party’s election manifesto states: “…we see that there is a vast regional disparity between different regions of the country along developmental parameters, particularly between the western part and the eastern part. Despite their richness in both natural as well as human resources, the eastern part of India still lags behind.” ⁵

The higher vote share that the BJP got in West Bengal, Bihar and Assam during the recent general elections might also help the party to work towards this objective.

Redirecting LNG import infrastructure is one way to get started. It will require a policy push to re-allot present and planned investments. The steps to be taken can include region-specific concessions to promote industries that can use the imported gas as feed-stock. The government can also consider inducing LNG-sellers across the world, including Canada and Australia, who have been courting India, to invest in re-gassing and pipeline facilities in the east and north-east. If the new government is serious about correcting regional growth disparities, this is the way forward.

Rajrishi Singhal is Senior Geoeconomics Fellow, Gateway House. He has been a senior business journalist, and Executive Editor, The Economic Times, and served as Head, Policy and Research, at a private sector bank, before shifting to consultancy and policy analysis.

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