Dealing with India's Oil Import Dependence

What is the issue?

With India's rising dependence on fuel imports, it has to adopt some strategic measures for it to survive during a crisis and prevent any macro instability.

How dependent is India for oil?

• India imports over 80% of its crude oil and the largest sources are Iraq, Saudi Arabia and sanctions-hit Iran.
• Overall, India’s import dependency in its energy mix has risen sharply from 21% in 2000 to 36% in 2015.
• It could be as much as 50% in 2040 even if energy production domestically grows faster than it has in the past.

What is the current challenge?

• As India modernises its economy, it will move away from older, less dense forms of energy such as biomass to more dense ones.
• But India largely lacks proven resources of oil, gas and metallurgical coal on the scale it requires.
• However, the consequence of this continued dependence for the external balance and for overall macro-economic stability is unwelcome.
• E.g. a spike in the price of oil drives up domestic inflation, stresses the fiscal deficit
• It can also drive India close to a crisis in terms of its balance of payments, as it did in 1991 and nearly did in 2013.

How feasible and effective are other alternatives?

• Coal - India does have extensive resources of coal, but not all of the proven reserves are of the quality needed.
• In order to ensure that Indian coal burns relatively cleanly, it would have to be processed or washed.
• But this can greatly add to water stress in the area around a coal plant.
• Areas already short of water, such as say Vidarbha in Maharashtra, can hardly afford a cluster of new coal-fired plants.
• Moreover, the effect of coal-fired plants’ emissions on greenhouse gas concentrations and the direct health effect on people also need to be taken into account.
• India may well be dependent on coal for many years into the future, but certainly alternatives will have to be found.
• Renewable energy sources are a major source of hope, especially as they are currently competitive in terms of variable costs.
• However, solar and wind power are not perfect substitutes for current energy sources, given that they are variable in terms of output.
• Wind farms produce power when the wind is blowing, and solar farms when the sun is shining.

What should India do?

• India will have to think strategically about the effect of continuing import dependence.
• In terms of survival during a crisis, India needs to ensure that there are sufficient reserves on its own soil.
• The strategic oil reserves being set up in cooperation with the UAE and Saudi Arabia are a good step in that direction.
• In terms of preventing macro instability, it must be ensured that the balance of trade becomes healthier.
• India needs to ensure that exports grow sustainably for it to stay confident to pay for imported fuel.

Source: Business Standard