What is the issue?
India’s economic fortunes continue to be tied to the sharply fluctuating price of oil, warranting a proper policy response.
What are the problems?
- Volume - India has well over 80% of its oil demand being met through imports.
- India thus clearly has a lot at stake as oil prices have risen by as much as 70% in rupee terms in the last one year.
- India urged oil-producing countries to reduce the cost of energy in order to aid the global economy in its path towards recovery.
- But countries like Saudi Arabia refused to openly commit to lower oil prices.
- Dollar Dependency - India also called for a review of payment terms, demanding the partial use of the rupee instead of the U.S. dollar to pay for oil.
- This is not happening given the absence of significant rival suppliers in the global oil market willing to help out India.
- Fall of rupee - The current account deficit widened to 2.4% of GDP in the first quarter of 2018-19 and is expected to reach 3% for the full year.
- The rupee, which is down about 16% since the beginning of the year, doesn’t seem to be showing any signs of recovery either.
- All this will likely weigh negatively on the prospects of the Indian economy, the world’s fastest-growing, in the coming quarters.
What are the measures taken?
- The government had set a target in 2015 to reduce India's oil dependence by 10% to 67% (based on import dependence of 77% in 2014-15) by 2022.
- Import dependence has only increased since then and the government is now looking for ways to raise domestic output.
- Reforms initiated in the last four years in the oil and gas sector, including open acreage policy, pricing reforms and liberalised licensing policy was towards achieving this measure.
- The government is looking at private investment to raise domestic oil and gas production, which has stagnated for the last few years while fuel demand has been rising by 5-6% annually.
- Also, the recent decision to marginally cut taxes imposed on domestic fuels is unlikely to be of any significant help to consumers.
What should be done?
- There should be a steep cut in Central and State taxes for the benefit to carry through to the consumers. Click here to understand about Petrol Pricing Mechanism
- Another long-term solution to the oil problem will be to increasingly tap into domestic sources of energy supply.
- India should also simultaneously involve in encouraging consumers to switch to green alternatives.
- In the short term, the government could look to diversifying its international supplier base to manage shocks better.
Source: The Hindu
