Oil Imports and Balance of Payments-II

Oil and Indian Economy

Oil is of paramount importance in economies worldwide. There is hardly a nation that does not seek this indispensable natural resource. Oil has many applications and without it almost nothing in the modern world will move. Oil wheels the industry, prospers agriculture, backbones the modes of transportation. India being an emerging economy needs all the more of oil. Oil accounts for 30% of primary energy consumption in the country. There is a huge demand for oil across all the sectors of economy. Realizing the importance of the petroleum sector, the Government has increasingly enhanced the capital outlays for the sector during the various Plan periods. Oil sector is also a major contributor to the exchequer to the tune of 20% by virtue of custom and excise duties. Corporate taxes and dividends from Oil & Gas PSU companies also finance the exchequer to a large extent. All in all oil contributes to 10% of India’s GDP.


India’s decreasing self-sufficiency in crude oil

India has been traditionally an oil importing country. With economic growth and modernization, demand for petroleum and petroleum products in India which has been on the rise, is expected to increase further. With domestic production not sufficient to cover up the huge demand, this exposes the nation to excessive volumes of oil imports and more importantly the crude oil prices, which have exhibited increased volatility over the years. Growth from emerging economies like China and India will continue to pose an upward pressure on the crude prices. Moreover, supply constraints like natural calamities may also force the crude prices on an upward climb hence creating additional burdens on the exchequer.


Summary of Balance of Payments for the year 2005-06

India’s Balance of Payments remained comfortable during 2005-06 despite record high oil prices and the redemption of the India Millennium Deposits. Although export growth remained robust for the fourth successive year and invisible earnings were buoyant, the current account deficit widened to US $ 10.6 billion during 2005-06 reflecting the cumulative impact of high level of international crude oil prices and growth in imports emanating from strong industrial activity.
Invisible earnings led by services and transfers financed a large part of trade deficit. Capital inflows were well in excess of current account deficit reflecting a sustained appetite for domestic financial assets.

As a proportion to GDP, the current account deficit increased from 0.8 per cent during 2004-05 to 1.3 per cent in 2005-06. Thus, unlike many other emerging markets, which continue to record surpluses, India’s current account balance shows a deficit. Current account developments during 2005-06 point towards growing openness and integration of the Indian economy with the global economy. The ratio of current receipts to GDP increased from 22.0 per cent in 2004-05 to 24.5 per cent in 2005-06. Similarly, trade openness – the ratio of merchandise exports and imports to GDP – has increased from 28.9 per cent during 2004-05 to 32.7 per cent during 2005-06.

External debt (as a proportion to GDP) continued to decline. Annual current receipts and the stock of foreign exchange reserves exceed the country’s stock of external debt.


High oil prices and BoP

The import bill on account of POL has a large impact on the balance of trade, the balance of payments and on the general health of economy. More analysis has already been covered in Part-I of the series.


The way ahead

The Government is looking forward to introducing 10% ethanol blended petrol in the coming two years, starting with a 5% ethanol doped petrol across the country from nine states. As per Petroleum Secretary M. S. Srinivasan 0.5 million kl ethanol would be required for blending 5% ethanol with petrol throughout the country.

Strategic reserves are another area that has got the attention of the Government during recent times. The Government is mulling building Strategic reserves at Vishakhapatnam and another one at Mangalore. Such reserves would provide the much needed cushion from the volatile prices of crude in the international market hence lesser strain to the balance of payments.


What other countries are doing

Nations like USA and UK have been facing record trade deficits on account of oil imports coupled with rising prices in the international market. Meanwhile nations like USA, Hungary, Slovakia, Germany, Poland Japan, South Korea, Taiwan, Thailand, Australia & China have already piled up huge stocks in strategic reserves which can be fell back upon during the times of supply constraints and also provide a safeguard against any abnormal rise in the international prices. Russia has begun plans for a strategic petroleum reserve. Japan is encouraging energy conservation to move towards efficient oil consumption and hence better forex management.