Sometimes in the wave of change, we can find our true direction. However, this seems to be untrue for India. India’s dependency on other countries for oil has changed dramatically since 1960s and we are still wavering. In the late 1960s, due to India’s rising import bill and availability of cheap crude oil, Soviet Union emerged as a major oil exporter to India and continued its dominance till the late 1980s. However, the scenario changed after the collapse of the Soviet Union and India was forced to look for alternative suppliers.
At present, the highest region-wise percentage share of crude oil imports for India (Ministry of Petroleum and Natural Gas, April-August 2018), is from the Middle East (64.3%) followed by Africa (14.3%), South America (10.6 %), North America (6.2 %), Eurasia (2.3%), Asia (2.2%) and Europe (0.1%). Among the Middle Eastern countries, Iraq (USD 15.3 billion), Saudi Arabia (USD 14.9 billion) and Iran (USD 9.9 billion) are the largest oil exporters to India (Directorate General of Foreign Trade, 2018-19 [April-Aug]).
CONSUMPTION GREATER THAN PRODUCTION-AN UNSUSTAINABLE APPROACH
The performance of production of crude oil in India has been appalling. Between 2011 and 2017, the production numbers declined from 38.09 MMT to 35.68 MMT whereas consumption grew from 204.12 MMT to 251.93 MMT (Indian Petroleum and Gas Statistics, 2017-18). Since the consumption demand has not been moving in tandem with the domestic production, the difference has to be met through enormous imports. India is a net importer of crude oil whereby 80% of its crude oil requirements are met through imports. The value of India’s net imports of crude oil and petroleum products have increased from USD 6,327 million (1.5% of GDP) in 1998 to USD 66,305 million (2.5% of GDP) in 2017 (Ministry of Petroleum and Natural Gas).
As a result, the Indian oil market tends to be more susceptible and vulnerable to the fluctuating global crude oil prices. In 2017 and 2018, there was a lot of murmur in the global oil market due to curtailment in the production by the Organization of Petroleum Exporting Countries (OPEC) which resulted in high demand and an eventual increase in the prices. For instance, the international crude prices [average of Brent, Dubai and West Texas Intermediate (WTI)] firmed up by more than USD 15 per barrel between July 2017 (USD 52 per barrel) and July 2018 (USD 76 per barrel) resulting in the Indian crude prices to display an increase from USD 47 per barrel to USD 73 per barrel (Reserve Bank of India [RBI]) in the same time period. However, the international prices have been following a downward trajectory since October 2018, reaching USD 56.58 per barrel in January 2019 (World Bank Commodity Price Data) due to excessive global production.
ADVERSE EFFECTS OF VOLATILE CRUDE PRICES:
Increasing oil prices widens the trade deficit, especially for a country like India where majority of crude oil is imported. Lately, this has caused a visible impact on the value of rupee as well as on the nation’s Current Account Deficit (CAD). A report by RBI titled, “The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation and Fiscal Deficit” by Ghosh and Tomar (2019) finds that if the Indian economy is hit by a crude price shock, CAD worsens irrespective of a higher GDP growth. For instance, CAD jumped from USD 7 billion in July-September 2017 to USD 19.1 billion in July-September 2018 (RBI) when the crude prices increased (figures for crude prices mentioned above). According to the Federation of Indian Export Organization, the rupee depreciated by over 13% in 2018 to reach 74 and continues to depreciate further.
Moreover, burgeoning oil prices have a direct as well as an indirect effect on consumer price inflation. The direct effect is through weighted contribution of crude oil prices in the CPI index and an indirect effect through increase in retail prices of commodities that use crude as an input. For example, CPI (Y-O-Y) rose from 1.5 % in June 2017 to 4.1% in July 2018 (RBI) as reciprocation to increase in crude prices during the same time period. As a result, to counter this rising inflation, RBI increased the repo rate for the first time under the current government on 6th June 2018 by 25 basis points to 6.25 %. This was followed by another increase on 1 August 2018 by another 25 basis points to 6.5 %. However, RBI in its Monetary Policy Review meeting on 6th December 2018 decided to keep the policy repo rate unchanged at 6.5 %.
This relationship between global oil prices and domestic inflation has been confirmed in one of the IMF Working Papers-‘Oil Prices and Inflation Dynamics: Evidence from Advanced and Developing Economies’ by Choi et al. (September 2017). With 72 advanced and developing economies including India over the period from 1970 to 2015, the authors find that a 10 % increase in global oil prices, increase domestic inflation by about 0.4 %, with the effect being alike for both advanced and developing economies.
ALTERNATIVES- ARE THEY FEASIBLE?
Due to the limitation of petroleum based fuels and concentration of finite reserves in some parts of the world, the issue of energy security for India is imperative. Therefore, continuance of crude oil imports is not a long term sustainable strategy for India, especially in an era where the banks are laden with humongous Non-Performing Assets (NPAs) and there is global tension on the trade front.
One of the solutions to this underlying problem should be to increase the use of ethanol, methanol, bio-compressed natural gas, di-methyl ether and electricity as alternatives to crude oil. For instance, along with reducing harmful particulate emissions, methanol can be produced from any biomass, including the municipal solid waste, which India has in abundance. Not only are the raw materials for these fuels available in the country, there is absolutely no need to change the design of the automobiles or the energy infrastructure of the country (Sehgal, 2018).
Is it feasible? The current blend rate- amount of ethanol mixed with petrol- is 2-3% and India aims to achieve a 20% rate. In order to accomplish such a target, the net sown area under sugarcane would have to be increased which would affect other crops and increase food prices. Therefore, if India considers ethanol as an alternative in the future, determined efforts will have to be made in order to improve sugarcane productivity through better irrigation practices (Jha, 2018).
Moreover, due to its hygroscopic nature, use of ethanol/methanol for a long period of time can cause corrosion of metal parts, degradation of plastic and rubber components and reduced engine life, especially in small engines and older automobiles. Therefore, precaution has to be taken since higher the ethanol/methanol content, the more severe the effects (Russell, 2016).
There is also a grave need for India to improve its public transportation. Efficient public transportation is the heart of any country and is pivotal for its socio-economic growth and development. It ensures the reduction of the number of vehicles on road, lowering the demand for fuel along with facilitating cleaner environment. Surely, the advent of metro has changed the transportation scenario in certain parts of the country but the state of buses still remains below par which is a major carrier for the people.
India lacks a strong, well connected and capable bus network which is confirmed by Niti Aayog’s report – “Transforming India’s Mobility: A Perspective (2018)”. It says that India (1.2) lags far behind countries like Thailand (8.6), South Africa (6.5), Russia (6.1) etc. in terms of buses per thousand population. Along with increasing the supply of buses, it is very crucial to introduce the right kind of buses. For instance, the Chinese city of Shenzhen introduced electric buses in 2009 and by 2017 it electrified 100 percent of its buses. The benefits of switching from diesel/petrol buses were not only confined to reduction in CO2 emissions and other pollutants, but it also helped them cut their fuel bill nearly by half.
If India makes determined efforts in adopting this technology it can be an opportunity to transform the face of our public transport, thereby bringing down the humongous crude oil import bill. As a move towards promotion of the electric vehicles, the Government of India approved a proposal for the implementation of scheme titled ‘Faster Adoption and Manufacturing of Electric Vehicles in India Phase II (FAME India Phase II)’ on 28th February 2019 addressing the problem of fuel security. It is an extension of the present scheme ‘FAME India 1 (2015)’ and will be implemented from 1st April 2019 with the main emphasis on manufacturing of electric vehicles and establishing necessary charging infrastructure in India for a period of 3 years.
However, the path to adoption of EVs is not without barriers. Apart from the cost factor, the biggest hurdle is the setting up of the charging infrastructure. The Government of India is planning to overcome the tribulation of developing charging infrastructure by introducing swappable batteries i.e. vehicles will be sold without the batteries. These batteries will be charged at centralized locations and then switched in as vehicles arrive with depleted batteries. This will not only reduce the upfront cost of the EVs, but also alleviate consumer concerns about the charging time (FICCI and Rocky Mountain Institute Report, 2017).
Even though the alternative choices have their fair share of disadvantages, there is an immense need for India to commence its work towards exploring other possibilities in order to shield itself from the brunt of any untoward event in the future due to the volatility in the crude oil market. Otherwise, the continued burgeoning imports will land India on crutches putting significant stress on the economy.
• Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas (August 2018). Monthly Report on Indigenous Crude Oil Production, Import and Processing & Production, Import and Export of Petroleum Products. Retrieved from URL http://ppac.org.in/WriteReadData/Reports/201809261258113108435WebVersion_MonthlyReportAugust2018.pdf
• Dunn C. & Hess T. (September 2018), “The United States is now the largest global crude oil producer”, U.S Energy Information Administration. Retrieved from URL: https://www.eia.gov/todayinenergy/detail.php?id=37053
• Ghosh S. & Tomar S. (2019), “The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation and Fiscal Deficit” Reserve Bank of India. Retrieved from URL: https://rbi.org.in/Scripts/MSM_Mintstreetmemos17.aspx
• Niti Aayog, Government of India (September 2018).Transforming India’s Mobility. Retrieved from URL https://niti.gov.in/writereaddata/files/document_publication/BCG.pdf
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• Sehgal R. (January 2018), “Modi Government pushes for alternative fuels, electric vehicles in a bid to curb air pollution”, Firstpost. Retrieved from URL https://www.firstpost.com/india/modi-government-pushes-for-alternate-fuels-electric-vehicles-in-bid-to-curb-air-pollution-4322695.html
• Times of India (September 2018), “For 1000 people, just 1.2 buses in India”. Retrieved from URL https://timesofindia.indiatimes.com/business/for-1000-people-just-1-2-buses-in-india/articleshow/65945392.cms
• Keegan M. (December 2018), “Shenzhen’s silent revolution: world’s first fully electric bus fleet quietens Chinese megacity”, The Guardian. Retrieved from URL
• Russell R. (2016), “The problem with ethanol in gasoline”, The Globe and Mail. Retrieved from URL: https://www.theglobeandmail.com/globe-drive/culture/commentary/the-problem-with-ethanol-in-gasoline/article29103634/
• Jha A. (2018) “Why ethanol blending in petrol might not work in India” Livemint. Retrieved from URL: https://www.livemint.com/Industry/RfNU5ZFXDRTrfUkl9lNMaL/Why-ethanol-blending-in-petrol-might-not-work-for-India.html
• FICCI and Rocky Mountain Institute (November 2017).Enabling the Transition to Electric Mobility in India. Retrieved from URL: https://www.rmi.org/wp-content/uploads/2017/11/report_electric_mobility_india_FICCI_RMI.pdf