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India’s oil-fuelled folly

India’s oil-fuelled folly
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First Published: Tue, Nov 04 2008. 11 14 PM IST
Updated: Tue, Nov 04 2008. 11 14 PM IST
A world teetering on the brink of a recession is hardly the place for optimism about exports. India is no exception. The trade data for the first six months of the year, however, tell another side of the story: Oil imports are fuelling a growing trade deficit.
From April to September, the trade deficit increased to $60 billion from the $39.1 billion figure during the same period last year. It is expected to touch the $127 billion mark in FY09.
During this period, imports stood at $154.7 billion and oil accounted for nearly one-third of this at $55 billion. On a monthly basis, from April onward, oil imports have hovered around 35% of the import bill. On a year-on-year basis, they’ve shown impressive growth: In April, they grew by 46% over the same period last year. In August, they shot up by almost 77%.
Prudence demands that when exports shrink, imports be rationalized, if not actually curbed. Oil, however, is a “political” commodity in this respect, one that is decoupled from economic fundamentals. Political interference has made demand for oil inelastic to changes in its price. In 2007, a better year from an export perspective, oil consumption in India, on average, was around 2.75 million barrels a day (mbd). In July this year, it stood at 2.77 mbd and in August, at 2.61 mbd. This is remarkably constant, given that oil prices touched a high of $147 a barrel in July.
Organization of the Petroleum Exporting Countries (Opec) data show that in the first eight months of this year, the demand for diesel in the agricultural and transport sectors grew by 10.5%. This strong demand added around 0.1 mbd to initial oil consumption forecasts. Petrol demand, too, grew by 8.1% in the same period. Demand in these sectors is politically sheltered and divorced from any concerns about the trade deficit and the current account deficit ballooning up.
Demand management policies are usually distasteful in an open economy, but at times there are few options left. Now that inflation is down (at least that’s what Indian policymakers feel), why not increase oil prices to curb consumption and thus make a dent in the trade deficit?
That is least likely, however, given the reckless mood in government at the moment.
Should oil prices be increased? Tell us at views@livemint.com
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First Published: Tue, Nov 04 2008. 11 14 PM IST
More Topics: Ourviews | Oil | Crude | Trade deficit | Inflation |