India cannot take comfort in low oil prices for long

NEW DELHI: It may not be right for India to take comfort from the failure of the oil-producing countries to freeze production to push up the falling crude prices at Doha on Sunday. It is true that the oil prices have plunged on Monday as a result of Saudi Arabia’s refusal to agree to a freeze as long as Iran, the second biggest producer after the kingdom, did not join in. Tehran did not attend the meeting.

Iran is enjoying exporting oil and earning precious foreign exchange after years of United Nations sanctions because of its alleged nuclear weapons programme. If the Doha impasse was a clear indication of the regional rivalry between Iran and Saudi Arabia, it seemed that it was good news for India, at least in the short term. But Oil and Natural Gas Commission (ONGC) chairman RS Sharma was realistic enough to tell this paper (dna, April 18) that the low oil prices are unsustainable. He admits of course that the low prices would free the economy from facing the pressure of foreign exchange payouts for the oil imports at a time when Indian exports have been declining because of extended global recession.

The NDA-led BJP government is well aware of the fact that the decline in crude prices from the middle of 2014, coinciding with Prime Minister Narendra Modi taking office, is a windfall, which has enabled finance minister Arun Jaitley to contain the fiscal deficit in the three Budgets he has presented so far. Unfortunately, the fall in oil prices has not boosted India’s economic growth in any significant manner because of subdued demand in the domestic economy. India’s seven-plus per cent growth rate since 2014 is positive because the other economies, including that of China, are clocking lesser rates of growth.

It is a solace indeed but it is not something to celebrate.

A simple fact is that low oil prices is not great news for India for more reasons than one. First, India in the last few years earned a quite a bit of its foreign exchange due to export of petroleum products because of its refining facilities in the public and private sector. As a matter of fact, India’s exports to the United Arab Emirates (UAE) is one of the highest foreign exchange earners because of petroleum products. It has also been pointed out by a research paper of the International Strategic Affairs in London that national oil companies (NOC) of emergent economies will be investing less in fresh exploration and expansion of capacity because it does not make sense to invest at a time when there is no demand for oil and the market prices are not attractive enough to fetch profits. In the long term, then, low oil prices mean depressed prices and that is not good.

India will have to step on the gas as it were, and increase the economic output both in the agricultural and manufacturing sectors, which will have a multiplier effect in the transport and service sectors. Though low oil prices are welcome, they are not sufficient to put the Indian economy on the high-growth trajectory. The policy-makers and market-watchers are well aware of this simple truth. The dynamics of international oil prices interlaced with the political rivalries and tensions in West Asia will follow their own course, and India cannot remain unaffected by it. That is why, India has been for more than a decade now investing in oil fields in places like Russia, Sudan and Venezuela.


Posted by on April 19, 2016. Filed under Nation. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.