India is one of the world’s largest oil consumers, accounting for around 4 percent of global consumption. Only the U.S. and China outrank India in this regard, making it a key player in the oil market.
While India’s oil consumption has seen remarkable growth in the past few years, the recent rise in oil prices may soon force the nation to scale back its reliance on oil importation. In this new oil price environment, continued import growth would put a significant strain on the country’s economy.
India’s Prime Minister, Narendra Modi, has largely benefitted from the slump in oil prices over the last three years, exploiting the low prices by levying a heavy tax on this key commodity. Before Modi came into office, Brent crude averaged $99.43 a barrel. In his very first year, that figure fell by 42 percent before hitting historic lows the following year when WTI dropped below $27.
As the economy has benefited from high taxation on petroleum and diesel, India has experienced a retail energy price significantly higher than that of its South Asian neighbors – with taxes accounting for half of the total retail cost of fuels in India.
As the price of oil fell, the Indian government increased the excise duty on gasoline nine times over the course of three years. The failure of the government to pass these savings on to the consumer resulted in the alienation of the poorer classes of Indian society.
At present, there is a $10.2 billion difference between the market and retail price of oil in India. This gap has led to India having one of the largest state supported societies in the world, with only Saudi Arabia, Iran, Venezuela and China spending more on state support.
A False Economy
When oil prices were low in India, the government saw earnings soar as it introduced heavy taxation on oil. However, rather than preparing for the inevitable fluctuation in oil prices the government spent the earnings on its bloated state support system.
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And now the chickens are coming home to roost. As oil prices have increased, Modi has been forced to plea with the top three Indian oil marketing companies, Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp., to sell product at a loss so that the state can keep oil prices stable. This short-term solution is far from sustainable.
As the next election looms, India is facing a plethora of problems – one notable example is the lack of funding in the public transport system. Furthermore, after the Indian government failed to pass on oil price savings to the population, the working class has been largely alienated. The lack of investment and the disproportionate wealth distribution in the country is leading to public skepticism over Modi’s policies.
Lobbying groups are constantly increasing pressure on the Indian government to invest some of its tax earnings from petroleum and diesel into the overcrowded public transport systems in some of India’s larger cities. The metro systems of Delhi, Mumbai, Chennai, Kolkata and Bengaluru provide the best transport network for locals to avoid both congestion and pollution. Yet, they are gravely underfunded.
Tackling the Addiction
So, what’s the best way for India to battle this addiction?
One obvious option that Modi will likely consider is to revisit an opportunity from a 2005 proposal. The Prime Minister could invite China to join forces with India in a bid to lower oil prices. With China and India together accounting for 17 percent of world oil consumption, these market giants could establish a bilateral agreement that would give the two nations the necessary clout to reduce the cost of oil from OPEC exporters.
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Another, more sustainable, option is to stop relying so heavily on fossil fuels and shift finances toward the development of renewable energies. India is already a significant developer of new technologies, with high hopes of manufacturing a large fleet of electric cars in the coming years. But with failing initiatives, such as the trial of India’s electric car service Ola, there are growing trepidations over Modi’s promise to make all new vehicles electric by 2030.
There were high hopes for expanding India’s renewables from the Paris Climate Agreement in 2015, with India promising to tackle its dependence on fossil fuels and its negative impact on climate change by installing 175 gigawatt (GW) of renewables power capacity over the next 7 years. However, targets have been repeatedly missed for solar, wind, hydro and bio power since 2016.
If Modi wants to convince the public and international powers that he can maintain a stable economy and follow through with initiatives to produce and use renewable energies, his ongoing reliance on toil will have to stop.
India’s pivot away from fossil fuels is fast becoming an economic necessity, and as long as oil prices remain high, India’s economy looks set to struggle.
By Felicity Bradstock for Oilprice.com
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Over the last two decades, global oil demand growth has been driven mainly by China, which accounted for most of the growth. However, a new contender has emerged: India.
A rise in per capita oil consumption (reflected in rising motorization of the Indian economy), a massive programme of road construction and a push towards increasing the share of manufacturing in GDP by 2022 could increase India’s oil consumption by at least a third. According to the IMF, India's economic growth is projected to hit 7.2% in 2018–19.
In 2017 India consumed 4.63 million barrels a day (mbd) against a production of 0.72 mbd thus creating a deficit of 3.91 mbd which had to be imported. India’s dependence on oil imports in 2017 hit 84% and this is projected to rise to 86% in 2018 and 87% in 2020.
The above statistics demonstrate without a shadow of doubt that it is virtually impossible for India to break its oil addiction.
The suggestion that India join forces with China in a bid to lower oil prices by exerting pressure on OPEC oil exporters is a non-starter. Both China and India need OPEC oil exports without which their economies will falter.
The other option of reducing dependence on fossil fuels by shifting finances towards renewable energy is not a short-term solution. It will take decades before renewable energy could start to reduce the country’s heavy dependence on oil. Even Japan, the United States, China and the European Union (EU) have not mentioned to reduce their dependence on fossil fuels by much. Still, from now until 2022, India is expected to be one of three countries (China and the US are the other two) accounting for two thirds of global renewable energy.
A more plausible and affordable solution would be for the government to invest some of its fuel tax earnings into the public transport systems in some of India’s larger cities rather than use it all to offset the government budget.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London