Sudhir Kumar Rakesh, IAS ( Retd.)
Patna : India is one of the major consumers of oil in the world. Due to rapid economic development of the Indian economy, we have become world’s fastest growing energy market. The fact can be understood if we keep in mind that India had surpassed Russia to become the third largest energy consumer in the world after China and the US in 2015 itself. Moreover, India had also surpassed Japan in 2015 to become the third largest oil consumer in the world after the US and China.
In the meantime, the CORONA crisis struck the world as a bolt from the blue. It has hit the Indian economy also, but not as hard as is being made out in certain quarters. On the contrary, because of the sudden and brutal fall in world crude prices, India stands to gain.
One of the major chunks of funding for domestic growth is to come from the greatly reduced oil import bill. How? Let us examine a few facts!
Import of crude oil during 2017-18 was 220.43 MMT valued at Rs 5,65,951 crore as against import of 213.93 MMT valued at Rs 4,70,159 crore in 2016-17 which marked an increase of 3.04 per cent in quantity terms and 20.37 per cent in value terms as compared to the import of crude oil during 2016-17.
India’s oil import bill in 2018-19 was nearly of the order of Rs 7,83,200 crore. According to one estimate, the crude oil import bill of India was estimated to decline to Rs 7,43,900 crore during the year 2019-20.
Thus the oil import bill of India has gone up from Rs 4,70,159 crore in 2016-17 to Rs 5,65,951 crore during 2017-18 to Rs 7,83,200 crore in the year 2018-19. Because of declining crude oil prices during the year 2019-20, as per the initial estimate the crude oil import bill was estimated to come down to Rs 7,43,900 crore during 2019-20. This estimate was based on an actual average price of $64 per barrel for April-December of 2019 and an estimated price of $66 per barrel for January-March. The assumptions were further based on an average exchange rate of Rs 71 per Dollar.
But, the CORONA crisis has impacted the world crude prices in such an adverse manner that on April 15, 2020, the crude oil was trading at Rs 1,583.00 per barrel for expiry dated April 20, 2020. On April 17, 2020, the crude oil prices touched a 21-year low of Rs 1381.00 per barrel for expiry dated April 20, 2020.
An analysis of monthly weighted average price of crude for India between the period April, 2018 to January, 2020, shows that during this period crude prices were at their highest in October, 2018 when the monthly weighted average price was Rs 5648.69 per barrel. During the same period between April, 2018 and January, 2020, the crude prices were lowest in December, 2018, when the monthly average weighted price was Rs 3822.07 per barrel.
During the same period, the highest percent increase in the monthly average weighted price of crude was in September, 2018 (10.24 percent over the previous month) and the lowest percent increase in the monthly average weighted price of crude was during November, 2018 (-20.76 percent over the previous month).
The aforesaid figures show that from the highest per barrel rate of Rs 5448.55 (for September, 2018) crude prices have slumped to about one-third of that level on April 17, 2020 (Rs 1,583.00 per barrel for expiry dated April 20, 2020).
One does not know how the crude prices are going to behave in the near future. Although OPEC+ countries (Russia and the OPEC countries), nudged by the US, have decided to go for heavy cut in crude production, thereby trying to artificially jack up international crude prices, in the near term this does not seem to be working because of massive fall in demand.
The problem with crude production is that it can not be taken below a minimum level. Even that level of minimum daily production requires continuous consumption because the total available global storage capacity may not be enough to go on storing crude even when there is no refining and consumption on a continuous basis.
If the crude prices are abysmally low, as they were on April 17, 2020, it may not be in the interest of any nation – India included. For the world economy to pick up, international crude prices must go up from these ridiculously low levels. But it may take some time. Unless the world opens up once again post – COVID-19 crisis, consumption of oil may not go back anywhere near the levels which would sustain international crude prices.
But the fact remains that even if crude prices recover considerably in future, India would be one of the major beneficiaries. It will also be one of the major drivers of growth in oil consumption because of its vast energy requirements. India has been able to insulate itself well against the present CORONA crisis which may help it in kickstarting its economic revival ahead of most other nations. India’s vast population and the resultant domestic demand place it in a favourable position to be able to do so.
Even by a conservative estimate, India is likely to make a saving of at least Rs 2,50,000 crore to Rs 3,00,000 crore in the present year on its oil import bill. This is a reduction of approximately 32 to 38 percent of the import bill during the year 2018-19 (Rs 7,83,200 crore). Because of Dollar-Rupee exchange rate fluctuations, on account of the actual volume of crude import by India during the year 2019-20 and also on account of the actual rates which will prevail during the remaining months of the financial year 2019-20, these projections may vary somewhat but it may not be a major variation.
We may also come to know in near future whether the Indian oil importing entities have entered into forward contracts for the purchase of crude. If so, at what prices? But rest assured, the Indian Policy Makers would have swung into action much earlier and would be alive to this task.
Once again, my request would be for all of us to please believe in the India growth story. Our fundamentals are sound and policy action is being initiated whenever and wherever required. This is only one of the few strengths of the Indian economy. The reduction in oil import bill alone is going to fund our domestic effort for revival of the economy to the tune of nearly Rs. 2,50,000 crore to Rs. 3,00,000 crore.
This amount is going to reduce the current account deficit of the Indian Government for the current financial year. This much cushion is going to be available with the government for providing stimulus packages in different tranches. This may also lead the major world rating agencies to revise their ratings for India.