Fuelling India’s Crisis
The Narendra Modi government increased excise duty on petrol and diesel nine times in 2016 and 2017 when crude oil prices were $40 a barrel. The expectation was that excise duty would be reduced when crude prices rose. That expectation was belied till public pressure and looming state elections compelled the government to cut petrol and diesel prices by Rs. 2.50 per litre. Several states have cut prices by an additional Rs. 2.50.
Union Finance Minister Arun Jaitley said the cuts will be shared between the central government (Rs. 1.50) and oil companies (Rs. 1.00). The revenue loss to the central exchequer is estimated at Rs. 10,500 crore. It will not, Jaitley claimed, affect the 2018-19 fiscal deficit target though the revenue deficit could be impacted.
High fuel prices are a symptom. The toxic cause underlying them is India’s failure over the past two decades to cut crude oil imports. India today imports over 81 per cent of its crude oil requirement. During the 1980s, ONGC’s gushing oil fields at Bombay High kept crude oil imports down to 65 per cent. Since then, as output from Bombay High fell, imports have crept up to unsustainable levels.
The impact has spread like a virus across sectors. The aviation industry is reeling under the rising cost of aviation turbine fuel (ATF). To add insult to injury, government-owned oil companies recently increased the tax on ATF by 7.3 per cent. Jet Airways and Air India are in serious financial trouble. SpiceJet, profitable till a quarter ago, is slipping into the red. Even bare-bones, low-cost Indigo Airlines is feeling the pain with profits plunging.
The inexorable rise in petrol and diesel prices has also cast a shadow over the automobile industry. Sales growth slowed in September with Maruti Suzuki India (MSI), the country’s largest automobile firm, recording growth of just 1.4 per cent over August. E-commerce firms, food delivery start-ups and logistics industries which rely on transporting products from factory to customer face cost over-runs.
The cause of this toxicity is a poorly managed energy policy. Oil exploration through the New Exploration and Licensing Policy (NELP) has floundered. The dispute between the Reliance Industries-led consortium and the Indian government over deepwater oil and gas fields in the Krishna-Godavari basin has led to a further fall in domestic oil and gas production. At the same time, protracted differences over taxation between Cairn India (a Vedanta group company) and the government has prevented Cairn from fully exploiting its domestic oil fields.
This energy-deficient contagion could spread further if it is not tackled on an emergency basis. Out-of-the-box thinking is required to boost domestic oil production to bridge the rising current account deficit (CAD), made worse by a weak rupee and steep crude oil prices.
One creative way to do this is by acquiring oil fields overseas. ONGC Videsh, (OVL), the overseas subsidiary of ONGC, already owns oil blocks abroad. It has now proposed to the petroleum ministry that India set up a Sovereign Wealth Fund like China, South Korea and Japan have done. The Sovereign Wealth Fund can finance the acquisition of promising overseas oil fields, reducing India’s reliance on crude oil imports.
OVL currently has 41 oil and gas projects in 20 countries. These blocks comprise 711 million metric tonnes of oil equivalent (MMToE). An Indian Sovereign Wealth Fund could finance OVL to acquire more high-yielding oil fields abroad, bringing down India’s crude oil imports to around 75 per cent from 81 per cent. Even this small decrease could have a positive impact on the CAD and the rupee. India’s nett oil imports (after taking into account refined petroleum exports) are nearly $100 billion (Rs. 7.2 lakh crore) and climbing as crude oil prices hover above $80 a barrel. They threaten to breach $100 a barrel when US oil sanctions on Iran come into force on November 4 and OPEC doesn’t quickly fill the demand-supply gap.
Rising oil prices can become an electoral issue beyond just the middle-class. The cost of transporting fertilizers will hurt farmers. The spike in the price of LPG cylinders can hit the poor across rural India. Subsidies on LPG cylinders may rise by an estimated 40-50 per cent over the budgeted Rs. 25,000 crore in 2018-19.
Oil at $100 and petrol at Rs. 100 per litre just before the 2019 Lok Sabha elections presents a nightmare scenario for the Modi government. Under pressure though it has demonstrated the ability to act swiftly to contain, for instance, financial contagion by superseding the board of Infrastructure Leasing and Financial Services Ltd. (IL&FS). It will need to show the same sense of purpose to solve India’s simmering energy crisis.
India has the potential to significantly cut oil imports by revving up the NELP process and enabling OVL to acquire oil fields across the world through a Sovereign Wealth Fund. Cutting even one-tenth of India’s oil imports priced at $80-85 a barrel could save foreign exchange of up to $10 billion (Rs. 72,000 crore). This would help bring CAD down to around 2 per cent of GDP from the level of 2.5 per cent towards which it is trending.
A collateral beneficiary would be the rupee, battered by rising interest rates in the United States and India’s deteriorating CAD. A stronger rupee and lower oil imports following acquisition of proven overseas oil fields through OVL can set off a virtuous cycle of a lower CAD and the fiscal deficit dipping to below 3 per cent of GDP. This virtuous cycle will help revive the aviation sector, boost the auto industry, energise logistics start-ups embedded in e-commerce firms, and lift GDP growth.
For Prime Minister Narendra Modi, there is also the prospect of an electoral dividend. But speed is of the essence. It took the government more than a month to move decisively on the IL&FS crisis once its full toxic nature was revealed. The cut in fuel prices too came belatedly amidst a public outcry.
The energy crisis that faces India is potentially more serious. Fixing it will require creative thinking and swift, decisive action.
