After three years of growth averaging about 7%, India finally seems to be fulfilling its economic promise. Yet, the primary challenge the country faces is how it deals with higher world oil prices.
The IMF, in its India country report put out in February this year, reckoned that “full pass-through (of higher world oil prices) would have an additional one-off impact on the wholesale price index of 2.5 percentage points.” Indian oil subsidies for the fiscal year ended March 2006 could rise to 1–1.25% of GDP, from 0.7% of GDP in the previous year, it said.
India imports about three-quarters of its oil requirement, and pressure on the currently benign inflation and interest rates is rising. Indian policy-makers are veering around to the view that higher global oil prices are here to stay. Announcing the annual monetary policy in April, the central bank governor YV Reddy warned that, if the full impact of higher world oil prices were to be passed on to Indian consumers, inflation could rise by one to one-and-a-half percentage points.
Oil demand in India is projected to grow as fast as in China, with an expanding manufacturing sector and rising vehicle ownership being the key drivers, according to the IMF. India’s giant state oil marketing companies are already bleeding; together they absorbed an estimated Rs300 billion in losses last fiscal year because of the subsidy on domestic fuel prices.
Those losses would have been much higher if the government had not issued oil bonds worth about Rs115 billion to them and raised domestic prices of petrol and diesel by about 15% last year. But as world prices are higher this year, and kerosene and LPG are still significantly under-priced, the losses continue to pile up. Indian Oil Company (IOC) chairman S Behuria told a television news channel in April that his company was losing Rs900 million every day.
Balancing different needs
India’s minister for oil and natural gas, Murli Deora, is acutely aware of the challenge. “For a developing country, domestic pricing of oil in a rising global oil price market is always a challenge. There are no clear-cut solutions which can be implemented off-the-shelf, considering that some of these fuels are used by vulnerable and economically weaker sections of our population,” he says in an exclusive interview with Emerging Markets. “Therefore, we need to take a considered view and proceed slowly while implementing price hikes, and at the same time also ensure the financial health of our oil marketing companies. A decision will be taken to balance these diverse objectives.”
Oil analysts expect that the government will announce a decision, including a price rise, only after mid-May once the ongoing elections in several states are out of the way.
Energy security is being given top priority by the government and “to counter short-term disruption in crude oil supplies, India is building a 5 MMT strategic crude oil reserve for itself. These reserves would be used to meet supply disruptions and also supplies at times of extremely high oil prices,” says Deora.
International projects
Intense negotiations preceded the signing of the civilian nuclear energy deal with US president George Bush, on his visit to India in March. If that deal is approved by the US Congress, it will greatly enhance India’s access to nuclear fuel and technology. Currently, nuclear energy contributes just around 6% to 7% of India’s energy requirement, while the share of coal is about half. US ambassador to India David Mulford told a gathering at a Washington-based think tank on April 24 that the US “had not changed the goalposts” in the nuclear deal with India, and that he hoped the US Congress would act on the agreement “sooner rather than later”, perhaps before September.
“I sincerely hope that US Congress and the nuclear supplier groups will see the wisdom of helping India to deal with [our] energy security [challenge] by backing
this deal that I and President Bush jointly agreed,” prime minister Manmohan Singh told Emerging Markets.
Analysts, however, predict that a decision on the deal could be delayed, perhaps until the end of this year, and the chances of it going through are about even.
Another ambitious project whose fate is yet to be determined is the controversial $4 billion India-Pakistan-Iran “peace” gas pipeline. At a recent meeting in Doha, the oil ministers of the three countries agreed to go ahead with the proposal, despite American reservations over Tehran’s nuclear programme.
The key element of India’s energy strategy is to strengthen the hydrocarbon sector, which has “lagged behind our demand requirement”, the minister explained. In April, India launched the ambitious sixth round of the National Exploration and Licensing Policy (NELP), under which as many as 55 oil and gas blocks are on offer, and for which bids will be accepted until September.
Marketing process
Deora, speaking to Emerging Markets on his return from an extensive tour to the US and UK to market NELP VI in April, says “the response has been overwhelming, and we hope that most of this would be easily converted into exploration plans in our largely unexplored country. The final results would be there to see for all in September.”
A transparent bidding process and a better regulatory framework, with the setting up of the petroleum regulatory board for the downstream oil sector, Deora hopes, will elicit a response from global oil majors. However, the reason that oil majors have not evinced keen interest in India in the past is perhaps geological, although recent gas discoveries in the Krishna Godavari Basin are encouraging, points out Urjit Patel, executive director at Infrastructure Development Finance Corporation.
When asked if India is looking to develop a relationship with China for the hydrocarbon sector, something his predecessor Mani Shankar Aiyar was keen on, Deora says he believes that “cooperation” is possible, and the two countries could jointly acquire foreign energy assets. “Both India and China are short on hydrocarbon resources. With large growing economies, both countries sit on the same side of the table in the global oil market ... In fact, we are already co-partners in some of the equity fields with China,” he points out.