Why is India resilient to oil volatility despite overdependence on imports?

In India over 75 per cent of electricity is generated from coal-based thermal plants. Oil accounts for less than 2 percent of electric power, writes S. Majumder for South Asia Monitor

S. Majumder Jul 21, 2022
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India over 75 per cent of electricity is generated from coal-based thermal plants

Pan India outrage  spiraled with the soaring inflation and government inability to control it. It pinched the kitchen costs of  almost all middle and lower income group. Angers were hurled against government failure to seize the oil price hike and its impact on inflation, hurting the general people’s  disposable income.

Inflation ( measured by CPI) increased by 6.34 percent in 2021-22 as compared to 5.01 percent in 2020-21. It  increased further in the first three months of the current year 2022-23 , despite government reduced petrol and diesel prices by lowering excise duties.

Clamour   sparked over the repeated hike in petrol, diesel and LPG prices. Since March 2022, petrol and diesel prices were hiked 4 times till it was reduced from May end , after the reduction of excise duty.  While comparing  with prices in most of the Asian countries, who are dependent on crude oil import, Indian prices are  now lower. For example, as compared to Delhi price of petrol  at   Rs 96.72/ litre,  in terms of Indian rupee  petrol prices were  Rs 113.96 / litre ( US $ 1.44)  in Vietnam, Rs 114.68/litre ( US $1.45) in China, Rs 102.22 / litre( US $ 1.29) in Burma, Rs 119.80/litre ( US $ 1.52) in Thailand, Rs 123.77 ( US$ 1.57) in Philippines , Rs 149.05/ litre ( US $ 1.89) in Laos and Rs 239.26 /litre ( US $ 3.03) in Hong Kong.
      
Nevertheless, did really oil price hike  increased   inflation  in the country ? The government records say a different story.  Factors attributing to inflation were food articles, and not the oil based fuel price . Food inflation increased  by 7-8 percent  in the first two months of current year in 2021-22 , as against  4 percent inflation in fuel and electricity. Food articles  have  biggest weight in the CPI Index ( 45.9 ) and fuel and electricity have  less weight  in the index ( 6.8).  These infer that increase in overall inflation was mainly due to food articles.  Weight in the  Index indicates the significance of the sectorial impact on  inflation.
  
But,  the aggrieved  people were reluctant to believe the government statistics and argued that the reality was different. They pitted that even though oil price hike had  less direct impact on inflation, it has indirect impact through  food inflation. This is  because most of the food articles are transported by road , due to poor railway logistics.

However, challenging the people’s perception,  Nomura report argued that food inflation was due to higher feedstock and uptick in MSP ( Minimum Support Price). Besides,  global protectionist policy on food has impact on the inflation in the country, according to the report.
India is the third biggest global importer of crude oil. Over 99 percent of crude oil required is met by imports. Domestic production of crude oil has remained stagnant over four decades in  the absence of new recoveries.
 
The last hike  in global oil price was during 2011-12  to 2013-14. During these 3 years period the  average Indian basket price of crude oil was US $ 111 per barrel  , as against  average price of US $ 77 per barrel in the preceding 2 years.
 
Notwithstanding, India could sustain a normal  GDP growth , which was at average of 5 to 6 percent over the same period.  These show that  the structural consumption of oil energy insulated  India’s growth, despite oil price hike.

Oil  is not the major source of energy for the growth  of  Indian economy.  Coal is the prime source of energy . The major sectors  of the economy, such as agriculture and manufacturing,  depend on coal base energy. In the balance sheet of energy uses, the coal accounts for 65 percent and oil accounts for 29 percent of total energy uses. Oil base energy is largely used for transportation and cooking gas energy . Eventually,  oil price hike has minimal impact on the manufacturing sector. Only a little more than one-tenth of its production is used for industrial energy purposes, such as fuel oil, naphtha and LDO (light diesel oil).

In India, over 75 per cent of electricity is generated from coal base thermal plants. Oil accounts for less than 2 percent of electric power. 

The major component of oil based energy   are petrol , diesel and LPG.  Petrol and diesel account for nearly 53 percent of total oil refinery products. Given the 100 percent petrol and nearly 80 percent of diesel are   used for transportation, nearly 45 percent of total oil refinery products are used for transportation. Added to these is LPG, which account for 14 percent of oil based  consumption. In other words,   60 percent of total oil based  energy is used for  transportation and cooking energy.  These decipher that oil is not the main energy  for industrial and agricultural growth   in India. 

Another factor which insulates India from the volatility of oil price hike is the export of oil refinery products. Oil refinery products are the second largest export items , after engineering goods. In 2021-22, it accounted for 16 percent of India’s total exports. 

Therefore, large foreign exchange outgo due to crude oil imports is   offset by the export of refinery products. In 2021-22, the net import ( export –import)  of crude oil and petroleum products was US $ 94, 466 million  as against total import of crude oil and petroleum products of US $ 162,075 million. 

It is thus a misgiving that large import of crude oil widens trade deficit.  

After  de-nationalization of petroleum industry in 1991 and dismantling of oil price mechanism in 2002, a large number of private companies participated in manufacturing oil refinery products. Today, Reliance Industries is the single largest producer of oil refinery products. These companies play a significant role in manufacturing and exporting oil refinery products.

(The writer is a former Adviser, Japan External Trade Organization, New Delhi. Views are personal.) 

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