Opinion
High Oil Prices Could Hit India's Growth
by
Sushma Ramachandran
India's hopes of reaching a
10 percent growth rate on a sustained basis may be dashed if oil prices
continue to rule at over $100 per barrel. Even the Planning Commission
in its approach to the Eleventh Five Year Plan has estimated that high
oil prices could affect the growth rate by up to 0.5 percent.
If this assessment, clearly a conservative one, is correct then the
country will find it difficult to continue on a high growth path for the
next few years. As of now, there is no indication that oil prices will
climb down from their present Himalayan heights. In fact, Goldman Sachs
has even made a projection that prices could reach up to $200 per
barrel. In such a scenario, emerging economies like India and China that
are among the largest oil consumers are going to be hard hit.
India's oil consumption may not be as high as that of China but it is
among the top 10 oil consuming countries in the world. Officials of the
Organisation of Petroleum Exporting Countries (OPEC), the cartel that
controls about 40 percent of the global oil supplies, have recently said
that the demand for oil is no longer largely from OECD countries. They
contend the market is now dependent on consumption by India and China
rather than the US economy, which has also been battered by high oil
prices. OPEC is clearly in no mood to raise production, which could help
to stem the continuing rise in crude oil prices. The oil cartel is
actually arguing that by retaining the existing status quo on production
quotas, it has helped stabilise the international oil market.
In view of the grim outlook on the oil front, it is time for the UPA
government to adopt an appropriate strategy to deal with the fallout of
a huge oil import bill. Estimates are oil imports will cost over $50
billion in the current fiscal. For the time being India has sufficient
foreign exchange reserves to finance these imports. But the increasingly
high cost of imports will put pressure on the trade deficit which is
enlarging at a rapid rate despite the fact that exports are growing at
healthy double-digit levels. Inflationary pressures on the economy are
also mounting despite the fact that the entire increase in global prices
has not been passed on to the domestic consumer. Though there has only
been partial pass-on of fuel prices, inflation has risen to 6.7 percent,
creating concern in the government with a slew of measures being
announced recently to curb further price rise. In case world prices
continue to rise over the next year, as has been predicted by some
analysts, the pass-on may have to be largr despite political compulsions
of the forthcoming general election.
The impact is already being felt in some sectors of the economy like
aviation. Domestic air carriers have announced a hike in fares to cope
with the increased prices of aviation turbine fuel. This in turn will
affect the booming travel and tourism industry. And this is not the only
industry that will be affected by higher fuel prices. The impact will be
felt across the board by industry, leading to increased production costs
and ultimately higher retail prices. In case this converts into a fall
in demand, there could be an impact on the overall growth rate of the
manufacturing sector, which has been a major contributor so far to the
high GDP growth.
The soaring oil prices could not have come at a worse time for the
present government. At a time when it is gearing up to face the polls,
due to be held in 2009, it would prefer to be seen as a pro-poor
administration handing out largesse like the loan waiver for debt-ridden
farmers in the budget. The skyrocketing world oil prices are instead
putting pressure on the government to take the unpopular step of raising
fuel prices. A small price hike has already been announced for
transportation fuels, but this is literally a drop in the ocean for
domestic oil companies given the record levels to which crude oil has
climbed in world markets. For the time being, the crisis has been
averted by increasing the amount of oil bonds being given to the oil
companies, but this is an accounting exercise for which the exchequer
will pay dearly in coming years. Apparently, it was left to Petroleum
Minister Murli Deora to point this out to Prime Minister Manmohan Singh
at a recent meeting to discuss the cut in customs duty on rude.
The high world oil price scenario has to be dealt with by the government
by adopting a strategy to diversify the country's fuel supplies. This
would include finalising plans for a gas pipeline from some neighbouring
countries. With the Iran pipeline sputtering toward closure, prospects
can be explored for one from Central Asian countries. Similarly, the
share of nuclear energy needs to be enlarged in the overall energy pie,
along with other non-conventional energy sources like solar and wind
energy. And, finally, the drive to find new oil by exploration in many
prospective regions of the country needs to be intensified by involving
the world's oil majors. In fact, high oil prices usually give an impetus
to exploration activity because at these levels, the high risk task of
finding oil becomes a more viable activity. A more serious drive needs
to be undertaken to find oil because studies by the Directorate General
of Hydrocarbons (DGH) indicate the country has several highly
prospective basins, in both on she and onland areas.
In any case, it is clear that the spurt in global oil prices is not a
short-term phenomenon. The world will have to live with high oil prices
for quite some time to come. And India, like other emerging economies,
will have to evolve a way in which to deal with this new world order in
the energy arena.
(Sushma Ramachandran is an economic and corporate analyst. She can be
reached at sushma.ramachandran@gmail.com)
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