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.
