India’s plan to reduce its dependency on oil imports by 10 per cent by 2022 is likely to take a marginal hit in current fiscal as good monsoon and gradual acceleration of economic activity is all set to push up crude oil demand in the country to the double digit growth.
But lower global crude oil prices would come to the aid of the country as even with growth in demand the overall crude oil import bill of the country would rise only marginally over FY17 when country imported about 213 million tonnes of oil by paying about $ 70 billion.
After breaching the $50 a barrel mark in early 2017, crude oil has again started moving downwards even though the OPEC directed production cut (1.8 million barrels per day from January 2017 to March 2018) remains in force. Only on Tuesday benchmark Brent crude was up 20 cents at $4 8.62 a barrel and US light crude oil was 15 cents higher at $ 46.17 after falling for last one month touching $ 45 a barrel mark earlier this month.
“The oil market looks range bound even in FY18 between $45 to $55 a barrel mark as a spike is not expected in well supplied market that is also getting increased production from OPEC members such as Nigeria and Libya that are not bund by production cuts. Moreover, US production is also rising,” said Debasish Mishra, partner, Deloitte Touche Tohmatsu India LLP.
“This should be good news for India that imports more than 80 per cent of its domestic oil requirements. Also lower oil prices will help India manage inflation as higher oil process has the potential to increase cost for many sectors,” he added.
The double-digit growth in demand projected for FY18 is significant considering that demand remained well below that level in FY17. Even with higher demand in FY16, India reduced its oil import bill by almost half as the average price of Indian basket of crude oil (main source for India comprising Oman and Dubai sour oil and Brent Dated sweet crude oil) slumped from an level of $84.16 a barrel in FY15 to $46.17 a barrel in FY16.
Last year (FY17) the average price of Indian basket of crude oil hovered around $ 47.56 a barrel.
“Though higher growth in oil demand may not be good news for India as this could also shoot up country’s high level of oil import bill and put pressure on fiscal deficit, lower oil prices should more than make up for that,” said another industry expert.
India has already benefited from slump in crude oil prices as its oil import bill nearly halved to $64 billion in 2015-16. The country imported 202.1 million tonnes of crude oil in FY16 compared to import of 189.4 million tonnes of crude oil for $112.7 billion in the FY15. Lower import bill has also helped to narrow India's current account deficit — the amount India owes to the world in foreign currency.
While lower oil price is good news for India, country’s import bill could vary substantially if there is either a spike in global oil prices or rupee depreciated during the year against dollar.
"If crude prices increases by $1 per barrel, net import bill increases by Rs 7,096 crore ($1.14 billion). And if exchange rate increases by Rs 1 to a dollar, net import bill increases by Rs 7,440 crore ($1.18 billion)," according to a report of petroleum ministry’s Petroleum Planning and Analysis Cell (PPAC).
Projection of lower oil prices has already put aviation stocks skywards. Even shares of public sector is flying on exchanges on news about consolidation and rising demand in the country. Also with upstream oil companies ONGC and OIL exempted from contributing towards under recovery on sale of controlled products sold by oil marketing companies (OMCs), their profits are expected move up further.
This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion. This amounts to nearly 0.43 per cent of the Gross Domestic Product — a measure of the size of the economy.
While the fall in global oil prices may be beneficial to India, it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news, according to a Kotak Securities report.
Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies, the report added.