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With Goldman Sachs projecting crude oil to reach $90 per barrel by the year-end, energy import-dependent economies are now in a tizzy. Mint looks at the implications for India, which imports 85% of its oil and 53% of its gas requirements.

How will the price rise impact India?

The recent surge in crude oil prices prompted both the Reserve Bank of India (RBI) and federal think tank NITI Aayog to flag the need for the Centre and states to contain input cost pressures on businesses. A further surge could put pressure to cut taxes, which may impact revenues and spending. Government spending had already seen moderation in the June quarter from the year ago period. RBI has forecast the economy to grow at 9.5% in FY22, comprising 21.4% expansion in the June quarter and 7.3% in the September quarter followed by 6.3% in the December quarter and 6.1% in the March quarter.

Should consumers be worried?

Oil prices have witnessed sharp volatility in the past. The price of India’s basket of crude oil that represents the average of Oman, Dubai, and Brent plunged to $19.90 in April last year during the first wave of the coronavirus pandemic. That gave the Central government an opportunity to raise taxes on petrol and diesel steeply, making excise duty one of the major contributors to the exchequer in FY21. However, global oil prices have now recovered and unless taxes are cut, any rise in oil prices will further pinch consumers. The price was $76.89 a barrel on 27 September.

High fuel prices
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High fuel prices

What’s happening with crude prices?

Crude rallied in the backdrop of hurricane Ida impacting US Gulf Coast production and a fall in US inventories. This comes at a time when global oil demand is rising. But industry sees oil prices softening next year. “Prices may come down in 2022, maybe to $65-$70 a barrel (on average)," S&P Global Platts said, quoting D.V. Mamadapur, exe-cutive director, international trade, BPCL.

What does India pay to keep engine running?

India spent $62.71 billion on crude oil imports in FY21, $101.4 billion in FY20 and $111.9 billion in FY19. It is a key refining hub in Asia, with an installed capacity of over 249.36 million tonnes per annum (mtpa). India has been calling for a global consensus on “responsible pricing" as it plans to grow its refining capacity to 400 mtpa by 2025. Diesel and petrol prices in India have already breached the 100 mark and are at a record high. Domestic diesel demand is expected to reach pre-covid-19 levels by Diwali.

What is the domestic outlook?

India is looking at private investment to raise domestic oil and gas production, which has stagnated for the last few years. Prime Minister Narendra Modi in 2015 had set a target of reducing India’s oil dependence by 10% to 67% (based on import dependence of 77% in FY15) by 2022. There has been an uptick in India’s gas production. According to the monthly production report released by the ministry of petroleum and natural gas, there was a 20.23% increase in gas production in August.


Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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