Thursday, December 3, 2020

Long-term solution

There is no denying the fact that India’s economic development and fortunes continue to stay tied to the sharply fluctuating prices of the crude in the international market. The volatility in the international crude prices has intensified in the recent months due to US-China trade war and disturbances in the Persian Gulf owing to friction between the countries for various reasons. Despite the fact that efforts at the international level have been made by various blocks to stabilize the crude oil prices, but there has been no impact on the Oil Producing and Exporting Countries (OPEC), which have been controlling the production and prices. The global economic slowdown has been seen in the past few years even when the crude oil prices touched the rock bottom about two years back. Prime minister Narendra Modi made a fervent appeal at a gathering of prominent oil ministers in New Delhi last week to reduce the cost of energy so that global economy could be put back on the path of economic recovery in the future. Modi also called for a review of payment terms, demanding the partial use of the Indian Rupee instead of the US Dollar to pay for oil, in order to ease the burden on oil-importing countries in the wake of the strengthening of the Dollar. With over 80 percent of its oil demand being met through imports, India clearly has a lot at stake as oil prices have risen by as much as 70 percent in Rupee terms since October last year. Notably, speaking at the same event, Saudi Arabian Energy Minister Khalid A Al-Falih refused to openly commit to lower oil prices, opting instead to say that the price of oil could have been much higher but for the efforts made by his country to boost supply. This is not surprising given the absence of significant rival suppliers in the global oil market willing to help out India. The ruling dispensation in India needs to initiate steps to seek help from the friendly countries which have been standing by it in the hour of crisis in the past. Efforts also need to be intensified for securing India’s energy needs for the future even when the prices in the international market keep on fluctuating so that economic activity is not hampered at any stage. The policy makers in India have never given a serious thought to the energy security in the past but now they face a stiff challenge on both the economic and diplomatic front. The policy makers have the difficult task of safely steering the economy in the midst of multiple external headwinds. Firstly, the current account deficit widened to 2.4 percent of Gross Domestic Product (GDP) in the first quarter of the current financial year and is expected to go up to 3 percent for the full year. The Indian Rupee, which is down about 16 percent since early this year, doesn’t appear to be showing any signs of recovery. Further, the growth in the sales of petrol and diesel has already been affected adversely as their prices are all time high. All this will likely weigh negatively on the prospects of the Indian economy, claimed to be the world’s fastest-growing, in the coming quarters. In the backdrop of this situation, the decision to marginally cut taxes imposed on domestic fuels is unlikely to have significant impact for the consumers. What is required is a steep cut in central and state taxes for the benefit to carry through to the consumers, which, of course, is unlikely given the government’s financial requirements. A long-term solution to the petroleum products problem will be to increasingly tap into domestic sources of energy supply while simultaneously encouraging consumers to switch to green alternatives. These alternatives will require a very strong policy framework and implementation. In the short term, the government could look to diversifying its international supplier base to manage its shocks in a better way. But this choice has its own geopolitical risks, such as in the case of Iran. All this will take a long time to reduce dependence of economy on crude oil imports, policy makers and planners should be willing to think beyond just the next election if India’s over-reliance on oil is to come to an end for the good in future.