The Hindu Business Line : India's hedge against oil shock

THE RISING oil price has not shocked the global economy. Though crude oil prices have jumped up by over $30 a barrel over the past one year, the global economy has not lost its growth momentum, quashing all speculation that it would take a severe blow.

Clearly, the oil shocks of 1973-74 (due to OPEC oil embargo), 1979 (Iranian revolution) and 1990 (Iraq's invasion of Kuwait) are still quite vivid.

Why has there been little impact even with the oil nudging $70 a barrel? There are basically three explanations. First, the oil intensity of the developed countries has decelerated dramatically over the years, one, by the efficient use of this source, and, two, switching over to other sources.

Second, the growth is happening more due to knowledge. Third, the oil price hike was demand driven; in the past, supply constraint was the main reason. For the last factor one key reason is China's sprinting growth, making it an oil guzzler. It is now the second biggest consumer of oil after the United States. China accounted for a third of the increase in oil demand since 2000. China is the third biggest importer of crude oil, after the US and Japan.

What of India, which imports 70 per cent of its crude oil requirement but has managed to sustain a commendable GDP growth? Nor is it a particularly efficient user of oil. The fact is that India's industrial growth is not oil intense.

According to a survey by FICCI of 147 medium and large units, the energy bill is about 20 per cent of the cost of production for a large number of companies. Of this, oil energy accounts for less than 20 per cent. This means, effectively only 5 per cent of the cost of the production is predicated on oil energy.

Happily, inflation, which has a high co-relation to oil prices, remained around a manageable 5-6 per cent. This is in stark contrast to the situation during the earlier oil shocks — the first saw the inflation rate go up to 25.5 per cent and the second by 17.7 per cent.

These were due mainly to the spurt in transport, and not manufacturing, cost. The transport sector accounts for about 50 per cent of the country's total oil consumption. In 2004-05, petrol, diesel and jet fuel together accounted for 51 per cent of the total petroleum products consumed. Then followed LPG and kerosene (about 20 per cent).

Prices of all these products are controlled by government, despite the dismantling of APM (Administrative Price Mechanism).

Heavy subsidies are doled out for kerosene and LPG. Thus, prices of about 70 per cent of oil products consumption are controlled by government. These controls hedged the pressure on inflation.

In other words, the actual impact of oil price hike was not reflected on the overall price situation in the country.

Unlike China, the growth in the economy and its extensive motorisation did not turn it into an oil guzzler. Its crude oil consumption increased moderately, by 4-5 per cent a year since 2002- 03, while GDP rose 7 per cent a year. India's import of crude oil increased at 6-7 per cent a year. Had the domestic production of oil registered even normal growth, leave alone improve, the import dependence on oil would have dropped.

In contrast, China's economy grew 9-10 per cent, and its consumption of crude oil rose by about 8 per cent a year since 2002. Its imports doubled from 69.4 million tonnes in 2002 — less than India's that year — to 122.7 million tonnes in 2004 — more than India's. And this is one main reason for oil prices to remain at high levels. As the Chinese economy booms, its demand for oil will rise further. Can this affect India's economy, which is just beginning to shine? India's oil elasticity to GDP has dropped over a period.

According to India Hydrocarbon Vision 2025, it was 2 in the 1970s, 1.2 in the 1980s and 1.1 in 1999. It is forecast to slide to 0.7 in 2025. The Vision 2025 assumed 6.5 per cent GDP growth. Based on these assumptions, oil consumption was estimated to grow at 4.6 per cent, reaching 156 million tonne by 2010. Domestic production is not expected to contribute significantly, and is estimated to pump in about 38 million tonne by that time. This means oil imports will be about 118 million tonne by 2010.

Can it affect the balance of payment position? Considering the 28 per cent annual growth in total imports, mainly non-oil, since 2002-03, the paranoia of the oil bill burdening the overall balance of payment seems exaggerated.

Since 2002-03, the oil import bill has hovered from 26 per cent to 28 per cent of the total imports, though the global oil prices have shot up by 53 per cent in terms of Brent crude and by 59 per cent in terms of Western Texas Intermediates.

Of course, the booming growth in exports and invisible trade surplus due to software exports and remittances also provide a cushion. Thus global oil price hikes are less likely to cast a shadow over Goldman Sachs's forecast that India's GDP will outstrip Japan's by 2032, and that its per capita income will be 35 times current levels by 2050.

(The author is a Senior Researcher with a Japanese MNC based in New Delhi.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Bursting the bags

Bravo, Tata!

India's hedge against oil shock

A volatile market should be left to professionals

Patents (Amendment) Act 2005 — Setback for innovators and R&D

`Foreigners are more confident about India than we are' — Mr C. J. George, MD, Geojit Financial Services

External IT service providers — Customer as a strategic partner

Business commissions