High Oil Prices Could Hit India's Growth

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)  


More by :  Sushma Ramachandran

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