Cutting down oil import bill key to India's GDP growth

The atest economic data may show green shoots of recovery through many indicators including rising GST collections, but the exchequer's revenue gains are likely to be pared by the firming up of global oil prices in recent months. For a country that imports over 80 per cent of its total consumption, the volatility of international oil markets has been a dismaying phenomena.

Prices of the benchmark Brent crude, which had fallen to about 61 dollars per barrel in March this year have now risen by over ten dollars to reach $72.60 per barrel. The hardening trend is of concern as the oil import bill could potentially be more than double in the current fiscal as compared to last year.

Last year, the situation was much brighter on the oil front. The Covid pandemic had brought global oil prices down to rock bottom levels. The average price during 2020-21 had dipped as low as 45 dollars per barrel. As a result, the country's oil import bill fell to 63 billion dollars as compared to 101 billion dollars in the previous fiscal.

This was partly due to low international prices but partly also to fall in consumption owing to curtailment of economic activity during the pandemic. In the current fiscal, however, both factors have altered significantly.

World prices are rising while domestic demand has increased owing to the gradual return to normal economic and commercial operations. The outcome is that oil imports in the first quarter of the current fiscal (April to June 2021) have reached $24.7 billion, roughly three times higher than in the same period of the previous year.

One of the major reasons for the latest spurt in oil prices has been the impact of Hurricane Ida on offshore oil production in the US about 80 per cent of oil output from the Gulf of Mexico has been curtailed owing to production platforms having closed down due to the hurricane.

Production in the Gulf accounts for about 17 per cent of total crude oil output in the US. But the hurricane's impact has combined with other factors leading to a hardening of world oil prices.

One of these is related to the potential impact of the entry of Iran oil into the market.

Earlier this year it was widely anticipated that sanctions against that country would be lifted soon, enabling Iran to begin exports again. But this prospect seems to be delayed indefinitely.

Negotiations between world powers and Iran have been stalled for about three months following the election of a new president in that country. It is now expected that Iran oil would enter the market only in 2022. Clearly expectations of the market going awry due to a flood of exports from this country are not going to be fulfilled this year.

The other major factor behind the bullish oil market has been economic recovery in many developed and developing countries owing to widespread vaccinations and reduced impact of the Covid virus.

In China, for instance, the renewed manufacturing activity has spurred higher demand for oil in one of the world's biggest buyers of this hydrocarbon. Even in India, the third largest oil importer, consumption of petroleum products has reverted to pre-pandemic levels.

In the light of this growing demand, global prices are likely to remain at enhanced levels for the next six months. This is despite the oil cartel, the Organisation of Petroleum Exporting Countries (OPEC) and its allies like Russia, now known as Opec plus, having decided to increase production from October onwards.

The output increases of 4,00,000 barrels per month are planned to be in line with increasing consumption as most countries return to normalcy in economic activities.

As for India, it will have to brace for a higher outgo of foreign exchange in the short term owing to a larger oil import bill. For the medium and long term, however, it has no option but to make a big push to move away from the reliance on hydrocarbons and shift to alternative energy sources.

It has to be conceded that this government has already set ambitious targets for renewable energy, such as solar and wind energy. It is also trying to move towards greater use of sugarcane based ethanol blends in petroleum products.

The move towards electric vehicles has equally been widely publicised, to the extent that the automobile manufacturers have complained about this issue.

The industry has argued that the expectation of EVs coming into the market has stalled purchases of vehicles using petroleum products. This may not be a justifiable response to the drive towards EVs but illustrates the focus being put on this sector.

As far as renewables are concerned, the move towards increasing ethanol production is being questioned by environmentalists. It is argued that increasing ethanol usage could widen acreage of crops that are water intensive and could potentially have an impact on water availability in the long run.

The immediate crisis of expensive oil imports, however, will have to be met by a nuanced approach. It would be wise to enter into negotiations with OPEC plus for greater concessions to emerging economies.

Saudi Arabia has already announced a one dollar per barrel discount for Asian buyers, indicating that a more thoughtful stance is being taken on this issue. The new Petroleum Minister Hardeep Puri, with the advantage of a background in diplomacy, is reported to have already begun some outreach to the main players in West Asia.

India will also have to continue its policy of diversifying sources of supply including purchases of shale oil from the US that have grown significantly over the past few years. Flexibility in policies is the need of the hour as world oil markets are increasingly volatile.

Such an approach will enable this country to meet its entire demand for this hydrocarbon without any disruptions in the future.