Is India’s Oil Demand Being Underestimated?

Huge jumps of 8.2% and 9.5% in Indian oil demand in 2015 and 2016 led to growing expectations that India had reached a critical developmental ‘take off’ point. Rising incomes, motorisation, road building and a drive to expand manufacturing in a country of more than 1 billion people would replicate China’s multi-year boom with profound implications for global oil demand.

In the end, Indian oil demand proved relatively disappointing, growing by only 2.9% in 2017 and 4.1% in 2018, and the forecast exuberance was reigned in.

Nonetheless, the evolution of Indian oil demand remains a critical component of future oil demand growth. In its 2018 World Energy Outlook (WEO), the International Energy Agency (IEA) forecast that for the period 2017-2040, Indian oil demand will more than double from 4.4 million b/d to 9.1 million b/d, an increase of 4.7 million b/d. This represents 41% of global demand growth over the period. In comparison, China, which accounted for 43% of world oil demand growth from 2000-2017, will see much more modest growth of 3.5 million b/d from 2017-2040.

In the IEA forecast, India would take over as the engine of oil demand, but wouldn’t have quite such a profound impact as China did from 2000-2017.

However, China’s expansion was widely and wildly underestimated. The IEA’s 2002 WEO took an in-depth look at Chinese energy demand and forecast that Chinese oil consumption would rise from 5.0 million b/d to 12 million b/d in 2030, a point reached in 2016, 14 years early.

BJP victory

The landslide victory of the Bharatiya Janata Party in India’s general election in May came despite low farm gate prices threatening to undermine the government’s rural support. The BJP won 303 seats in the lower house of parliament, up from 282 in 2014, giving it an enlarged outright majority and ensuring another five-year term for Prime Minister Narendra Modi.

Modi’s pro-business economic policies and preparedness to spend on infrastructure bodes well for further gains in Indian oil demand. The economy appears to have rebounded from the impact of the removal of high denomination bank notes in 2016. The introduction of the Goods and Services Tax from July 1, 2017, despite its complexities, removes many barriers to interstate trade. Modi’s ‘Make in India’ programme should boost the manufacturing sector.

For oil, investment in roads is particularly important. While India already has the second largest road network in the world behind the US, its quality is poor and it comprises mostly rural roads rather than highways. However, the central government, which is responsible for highways, has each year increased its road building budget. In fiscal 2017-18, the government built 9,829 km of highway, more than double the 4,250 km built in 2013-14, the last year of the previous administration. A further 300 highway projects are expected to be complete this year.

Improvements to rural roads, responsibility for which again lies with central government, under the Ministry of Rural Development, are also being made. Spending is supported by programmes like the Pradhan Mantri Gram Sadak Yojan rural roads project, which received an additional $500 million in World Bank funding in June last year.

Better roads mean improved freight transport and higher oil demand. While Indian car sales are experiencing a major downturn, sales of heavy-duty trucks are rising fast. Car sales dropped 15.9% year-on-year in April, the tenth consecutive month of decline, according to the Society of Automobile Manufacturers. In contrast, commercial vehicles sales rose over 1 million for the first time in fiscal 2018/19, with medium and heavy commercial vehicle sales reaching a record 351,128, up 15% year-on-year, while light commercial vehicles sales jumped 21%.

Rural-urban migration

China’s oil boom was created by investment-led growth in heavy industry and manufacturing, with the economy now reaching a less energy-intensive stage of development in which services have risen as proportion of GDP at the expense of industry.

India already has a large services sector, but also a large primary sector, mostly agriculture, which in 2017 made up 16% of GDP in contrast to China’s 8%. India’s GDP per capita on a purchasing power parity basis has grown much more slowly than China’s. In 2000, India’s GDP per capita was 73.5% of China’s, while, in 2017, is was just 42.5%. Yet India has long passed the income take-off point which China appeared to reach in the early to mid-2000s.

The BJP’s election victory was surprising in the face of very low increases in agrarian incomes over the last four years and rising levels of rural indebtedness. Small farmers are also largely excluded from formal financial structures such as bank lending and insurance.

The government has adopted a target of doubling farmers’ incomes by 2022, but it is not clear how this will be achieved without higher productivity, which will require increased mechanization and further reductions in rural employment. In recent years those that have made profits from agriculture in India have been agribusinesses rather than traditional small farmers.

In India, the rural population accounted for 66% of the total in 2017, down from 72% in 2000. In China, the rural population has dropped much faster, from 64% in 2000 to 42% in 2017.

China’s rural-urban migration was one of the largest mass movements of people in history. It reflected both push and pull factors; a decline in rural incomes and the increasing availability of urban jobs, as well as an increasing disparity between the services and housing available in rural and urban environments.

It was also a key under-estimated factor driving Chinese energy demand as the government rushed to deliver new urban homes, mass transport and centralised city services for hundreds of millions of people who spent their new urban incomes on white goods and cars.

A push by India today to expand its manufacturing capacities would not be as energy intensive as China’s expansion in the late 1990s and 2000s because India will be able to adopt more energy-efficient machinery and practices. However, the signs of rural economic distress which failed to rebound on the BJP in 2019 will be hard to address as rising demand for food benefits agribusiness over traditional practices. If a more intensive and unforeseen shift in Indian energy demand is to occur, it will start in the countryside and end in the cities via rural-urban migration, an element of development which can be moderated but rarely, if ever, avoided.