Oil Imports and Balance of Payments-I

Oil is the only commodity that is so well woven around the economic activity in the nation that it has a very close association with the GDP of the country. On the Macro-economic front every $10 rise in oil prices translates into 1.2% reduction in India’s GDP growth, inflation could rise by 1% and Current Account deficit could further widen up to 0.3% of GDP. This may lead to changes in the monetary policy responding with higher rates of interest which further chokes the growth momentum in the nation by discouraging the investment climate.

Petroleum products constitute the single most important bulk item in the composition of imported items in India. Oil imports at $44 billion have increased by 47.3% in the last fiscal primarily on account of elevated international oil prices. The oil import bill as a percentage of GDP stood at 5.5%, up from 2.9% during the preceding fiscal. This is inspite decreased domestic consumption during the last fiscal. Though the petroleum products exports worth $10.54 billion registered a growth of 66.5% in last fiscal, notwithstanding this the net oil import bill jumped a high of 48.6% causing huge trade deficits for the nation and leading to a drain on the forex reserves. This is supported by the fact that the oil trade accounts for 66% of the overall trade deficit.

Though the overall Balance of Payments is maintaining a surplus status since last few years and contributing towards the all important forex reserves; the oil imports have the potential to erode the benefits accruing to the nation due to increased economic activity which has brought forward the attention of nations across the globe. Oil import transactions affect the management of forex reserves, including exchange rate management.

This shifts the focus on steps that can be taken to overcome huge oil trade deficits. India sources around 70% of its crude needs from imports. Such a huge forex outgo could have been utilized in a productive manner for meeting the needs of a fast growing economy like ours. This also brings up the issue of security of oil supply for the nation. Managing the risk of volatile oil prices in international market and an uninterrupted supply line for the nation can lead to an optimal foreign exchange reserve management.

Oil refiners can export value added products to foreign markets thus contributing to country’s GDP and also narrow down the oil trade deficits. Upcoming refineries can cater to these requirements. Speeding up the process of bringing in the substitutes of oil can meet a good chunk of oil demand in future. Growth in indigenous oil and gas production will also calm down the oil import bill.