Decoding India’s oil conundrum

Summary

Oil is black gold for India. India imports a lion’s share (approximately 85%) of its crude oil requirements. The import dependence, resulting in a sizeable chunk of outflows, continues to eat into our forex reserves and makes up more than 20% of India’s import bill. The recent plunge in oil prices due to a decline in demand has worked to India’s advantage. Oil imports, the largest component in the import bill, declined by 72% YoY, reaching USD 3.5 billion in May 2020. This fall in oil imports comes in connection with a decrease in global average crude oil prices by 54.5% YoY in May 2020. However, OPEC countries have indicated that low oil prices are unsustainable in the long run. India needs to seriously consider and work towards sustainable alternative solutions to reduce its oil dependence in a calibrated manner in the long run. Oil de-risking is the need of the hour.

Oil is black gold for India
 
India, the world’s 3rd largest oil consumer, imports a lion’s share (approx. 85%) of its crude oil requirements. The import dependence, resulting in a sizeable chunk of outflows, continues to eat into our forex reserves and makes up more than 20% of India’s import bill.
 
COVID 19 and the slump in oil prices

While COVID-19 has set off a contagion of disastrous consequences i.e., severe economic downturn coupled with a loss of human lives, the only blessing in disguise has been the decline in oil prices.

The monthly average price of global crude oil stood at USD 21 in April 2020 with a brent crude oil touching a historic low of USD 9 per barrel on April 21, 2020. On a YoY basis the global crude oil prices eased by 69.3% in April 2020.

India’s gain from the oil price drop

The recent oil price plunge due to the global decline in demand has worked to India’s advantage. It is estimated that for every one dollar decline in the price of oil, India stands to gain USD1.5 bn (annualized basis) in its imports bill. As a prudent step, India has leveraged upon the recent low oil price opportunity and has built strategic oil reserves of 5.33 million tonnes (forex savings estimated to be worth Rs 50 billion) and is even exploring offshore storage.

Oil is a tricky subject

India’s relation with crude oil may be termed as complicated. For a developing country with a vast population of over 1.3bn, industrial activity to support its citizens' economic aspirations is necessary. Accordingly, demand for oil is a natural by-product of the need to sustain livelihoods from fuel-dependent activities like manufacturing, transportation, domestic use, military purposes, and the likes. Thus, while elevated levels of oil consumption indicate economic activities at full throttle, on the flip side, inflated import bills can strain the fiscal deficit due to the related oil subsidies. At least for now, the trend of low oil prices has come as a welcome relief, as far as controlling the fiscal deficit and current account deficit is concerned. Owing to the curtailment in imports driven by a drop in domestic economic activity, it is learnt that India is all set to record a current account surplus in Q1FY21.

India’s overall balance of trade enters positive territory

India's goods trade deficit narrowed down to a record low of USD 3.2 billion in May 2020, resulting in an overall trade surplus (goods plus services) of USD 4 billion in May 2020. This surplus is largely driven by import contraction rather than a rise in exports of goods and services. Export and imports of goods contracted for the third consecutive month by 51.1% YoY and 36.4% YoY in May 2020, respectively. The import and export of services also contracted by 31.4% YoY and 15.9% YoY in May 2020, respectively.

Oil imports, the largest component in the import bill, declined by 72% YoY reaching USD 3.5 billion in May, 2020. This fall in oil imports comes in connection with decrease in global average crude oil prices by 54.5% YoY in May, 2020. It is estimated that an annual growth of 4-5% in domestic fuel demand would take at least  two years to normalize.

Oil and petroleum imports:

Towards an oil de-risking strategy

India needs to seriously consider and work towards sustainable alternative solutions to reduce its oil dependence in a calibrated manner in the long run,  given that oil is a finite resource and it is related to fuel price fluctuations.

Globally too, there is a consensus building about the importance of energy security. In the recent past, OPEC countries have indicated that low oil prices are unsustainable in the long run as certain high cost producers may be forced to close business, which would result in a supply gap and consequent oil price hike.

Taking the hint about the impending oil price hike and aligned to the spirit of AtmaNirbhar or self-reliance, it might be prudent for India to reflect upon its energy security and how it can be achieved, with minimal disruption to the existing ecosystems. Oil de-risking is the need of the hour. Wherever possible, diversification of energy with adoption of alternate sources like import of gas and still better, embracing indigenous fuels like coal should be encouraged.

Written by:

Guest Columnist

Sandhya Krishnan

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