By Subrata Majumder
India is an oil guzzling nation. It is the third biggest oil consuming country in the world. India is also an oil import dependent country. Over 85 percent of crude oil requirement is met by imports. Resultantly, any hike in global crude oil prices should have a cascading effect on its economy and its balance of payment situation.
Brent crude price spurted to US $ 75.68 per barrel on 8th May 2018, after it dipped to US $ 30 per dollar in the beginning of 2016. Since then the prices witnessed unhindered increase. According to a conventional estimate, every increase of crude oil prices by US $ 1 per barrel leaves an impact of $ 1billion on the current account balance. Seen in this context, the hike in global crude oil prices should have signalled an alarm for the Indian economy. But, the reality is different
Global crude oil prices rose because of robust oil demand on the one hand and slow pace of output by OPEC countries, on the other. OPEC contributes nearly 40 percent of the global oil trade. From mid-2014, oil prices began to slide. The main reason was low demand from European countries, thanks to the bigger flow of US shale oil. It dashed OPEC’s global share to 41.8 percent in 2014 from 44.5 percent in 2012. But OPEC refused to cut down their production initially. This led to oil prices tumbling in the world market.
The continued fall in the oil prices forced OPEC to agree to cut production and extend it through 2018. On November 30, 2016, OPEC agreed to cut production by 1.2 million barrel per day, starting from January 2017.
Whatever may be the reasons for oil price hike, fears loom over the negativity of the impact. Inflation is the first target in the hit list of oil price hike in India. Conventional wisdom says that higher the oil prices, the higher will be the inflation rate. For example, during the last oil price hike between 2011-12 and 2013-14, when the basket price for imported crude oil hovered between US $ 105 and US $112 per barrel, retail inflation perked up by 9 to 10 percent.
The main reason for the impact on inflation is that oil energy is mainly used as transport fuel in the country. Nearly 55 percent of oil energy is used as transport fuel. The high cost of transport fuel impacts prices, particularly of food and vegetables. The food component constitutes a bulk of the wholesale and retail price indexes. Motor transport, viz. trucks and lorries, are the major carriers of food and vegetables in the country.
But this positive co-relation between oil price hike and the uptick in inflation is clearly absent during the current oil price hike. Despite the Brent crude price shooting up by over 100 percent since January 2017, retail inflation in India continued to be at low ebb. During 2017-18, retail inflation, measured by Consumer Price Index, increased marginally by 3 percent.
Nevertheless, oil price hike has a simmering impact on the manufacturing sector. Unlike other countries, oil is not the major source of energy for manufacturing in India, which happens to be coal. Oil accounts for a little more than one-tenth of its production for industrial energy purpose, such as fuel oil, naphtha and LDO (light diesel oil). Diesel oil is also used for power generation. But its share is insignificant from the perspective of total diesel consumption in the country. Less than one percent of high speed diesel is used for power generation.
Against this structural set-up of oil product consumption, it is unlikely that oil price hike will cast a major impact on the Make in India initiative, although concerns were expressed over the impact on the balance of payment situation. An insight into the balance of trade and its structural set-up would, however, reveal that the threat of big damage to BOP and foreign exchange reserves is overemphasized. India is also a big exporter of petroleum products, while being a major importer of crude oil.
After the de-nationalization of petroleum industry in 1991 and dismantling of oil price mechanism in 2002, a large number of private companies participated in the manufacturing of oil refinery products. Today, the Ambani Group is the single largest producer of oil refinery products. These companies play a significant role in manufacturing and exporting oil refinery products. Resultantly, oil refinery products have become a major item of the export basket of the country.
Exports of oil refinery products account for about 12 percent of India’s world exports. In 2016-17, India exported oil refinery products worth US $ 29,054 million. Considering export as an offset to the import burden of crude oil, the net import of oil and petroleum products is substantially reduced. This imparts lesser impact on BOP. In 2016-17, the net import of crude oil and oil refinery (import minus export) products was US $ 51,791 million. This accounted for 13.5 percent of India’s total import from the world, against the gross import, which accounted for 22.7 percent of India’s total in 2016-17. Gross imports of crude oil and petroleum products were US $ 80,845 million in 2016-17.
In India, oil price / supply volatility is less vibrant in relation to the major economic parameters for growth. Since three-fourths of the oil energy is used for transportation industry (55 percent) and domestic fuel/ rural lighting (14 percent), less energy is used for value addition in the economy.
The Indian economy is agrarian-based. Oil dependency of agriculture for energy sources is miniscule – only 10 percent. The main energy source for agriculture is electricity, which is coal based and partially depending on solar and wind energy. Nearly 90 percent of the energy required for agriculture comes from coal based electricity.
Similarly, coal is the main source of Industry energy. The oil dependency of industry is limited to 12 to 14 percent only. The major oil based industries are fertilizer and petrochemicals.
To sum up, given the abundant sources of availability of non-oil energy and the structural composition of oil consumption, India is insulated from any major downturn in its manufacturing initiative due to oil price hike. (IPA Service)
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