Millennium Post

Focus on import intensive sectors for sustainable growth in India

India is set to become the world’s fastest-growing big economy, according to the World Bank. This apparent fact suggests that India’s energy-consumption and technology-absorption capacities will also increase significantly. Although growth is welcome in any society, a sudden hike in the import bill can actually threaten the desired outcome. This indicates that the “Make in India” strategy must focus on sectors that are outlets for foreign exchange.

The two major components of India’s import bill are petroleum and electronic goods. Any effective strategy to ensure that the fruits of development are enjoyed within the country must focus primarily on these sectors. The argument that growth will be accompanied by expansion in both research and manufacturing of electronic goods, with encouragement through policy measures, does not seem entirely wrong.

The situation, however, is quite different when it comes to the consumption of energy, which is likely to drain the Indian economy.  As part of International Energy Outlook 2013, the US Energy Information Administration (EIA) has projected that India and China will account for about half of global energy demand growth by 2040, with the former’s energy demand growing at the rate of 3 per cent per year. The demand for primary energy in India will increase threefold by 2035 to 1,516 million tonnes of oil equivalent from 563 million tonnes in 2012.

India is the world’s fourth largest consumer of energy – after China, USA and Russia. Collectively, oil and gas comprise more than 45 per cent of India’s energy basket. Around 80 per cent of its crude oil and a fourth of its natural gas requirements are imported and India pays a heavy price for these products. Inadequate supply of hydrocarbons – coal, oil and gas – forces the country to pay a high oil import bill – $150 billion in the last financial year.

In recent weeks, crude oil prices have almost halved to $60 per barrel from $115 in June 2014. This downfall is attributed to surging supplies and dropping demand. Demand in North America and Europe is stagnant, while it is slowing down in China and the Middle East. Supplies, on the other hand, have spurted due to the shale revolution in the US and increased indigenous output from Libya, Iran and Iraq.

This is good news for downstream oil companies. It is, however, a cause of worry for companies engaged in exploration and production because a thinner free cash flow forces capital expenditure to restrict infrastructural reinforcement. Globally, many upstream oil and gas companies – including Marathon Oil Corporation, ConocoPhillips and Chevron – have adjusted their budgets for 2015.

At the start of 2014, India had nearly 5.7 billion barrels of proven oil reserves, mostly centered in the western part of the country. The country also has 47.8 trillion cubic feet of gas reserves that are mostly located offshore. Indigenous development of hydrocarbon resources has always been tough for India. Production has hovered around 40 million tonnes annually in the past four to five years. Therefore there is a dire need to improve output through exploration.

The Central Government has taken some constructive steps. Bottlenecks have been identified, among them a structured revenue-sharing model instead of production-sharing contracts, which will encourage and attract upstream companies to invest in resource development. Offering attractive prices for crude oil under the globally accepted Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR) schemes will facilitate the extraction of more hydrocarbons from old and ageing wells. Over time, EOR/IOR schemes are expected to raise production up to 5 to 10 per cent.

Most importantly, however, the fall in crude oil prices implies a lower subsidy burden. At $105-$110 per barrel, the government estimated a 26 per cent decline in petroleum subsidy for the current financial year to Rs 63,426 crores, as against Rs 85,480 crores in the last fiscal year. Industry experts believe that for every $1 fall in crude oil prices, India’s import bill drops by Rs 3,700 crore. This figure is likely to get better considering the slide towards $60 per barrel.

This does not mean that an energy deficient country like India can afford to be complacent and withdraw focus from indigenous explorations. We must not forget that burgeoning prices of oil played a major role in the recent economic crisis that brought down our growth rate to less than five per cent. A repeat scenario cannot be ruled out.

A Morgan Stanley-approved India Economics report said in September 2014 that a 10 per cent correction in the price of crude oil brings down the Current Account Deficit (CAD) by 0.6 per cent of Gross Domestic Product (GDP). The CAD for the first half of the current fiscal year was at 1.9 per cent of GDP.

It would be prudent to augment our reserves for potential short-term disruptions in energy supplies. At present, India has a storage capacity for just 70-75 days. Four proposed projects across Rajasthan, Gujarat, Karnataka and Odisha (with a combined capacity of 12.5 million tonnes) are likely to raise that to 90 days by 2020. In addition, three storage facilities with a combined capacity of 5.39 million tons, capable of sustaining 15 days of consumption – at Vishakapatnam, Mangalore, and Padur – are on the verge of completion.

A fillip to indigenous exploration and production of oil will ease the strain on the Centre and state government’s coffers. The “Make in India” initiatives also implies “make oil in India”, as well as “save in India”. It will not be wrong to believe that it is the most opportune time to have a fresh look at the energy strategy. Should there not be a shift towards expediting exploration for more reserves? Efforts in this direction will come handy in case there is a spurt in global oil prices.
Next Story
Share it