Relevance: GS Paper III (Indian Economy)
Theme of the article
India must diversify its energy basket more proactively.
Why has this issue cropped up?
India’s economic fortunes continue to be tied to the sharply fluctuating price of oil.
Call to oil producing nations
- Recently, Prime Minister urged oil-producing countries to reduce the cost of energy in order to aid the global economy in its path towards recovery.
- He 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, in order to ease the burden on oil-importing countries in the wake of the strengthening of the dollar.
The concern with rising oil prices
- With well over 80% 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% in rupee terms in the last one year.
- Saudi Arabia Energy refused to openly commit to lower oil prices. This is not surprising given the absence of significant rival suppliers in the global oil market willing to help out India.
- The current account deficit widened to 2.4% of gross domestic product 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.
- Further, the growth in the sales of petrol and diesel has already been affected adversely as their prices have shot through the roof.
- All this will likely weigh negatively on the prospects of the Indian economy, the world’s fastest-growing, in the coming quarters.
Way forward
- In this scenario, the decision to marginally cut taxes imposed on domestic fuels is unlikely to be of any significant help to 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 fiscal needs.
- Another long-term solution to the oil problem will be to increasingly tap into domestic sources of energy supply while simultaneously encouraging consumers to switch to green alternatives. This will require a stronger policy framework and implementation.
- In the short term, the government could look to diversifying its international supplier base to manage shocks better. But such a choice carries geopolitical risks, such as in the case of Iran.
