Every economic crisis in India has been triggered by excess of dollar spending over dollar earnings leading to a foreign exchange crisis. The first two, in 1957 and 1965, were caused by dystopian policy on capital goods and drought-driven food imports. Since then, almost in every decade, in 1974, 1979, 1982, 1991, and more recently in 2013, the economy has mostly slipped on the oil slick. The baritone of rising crude prices and the shrieking falsetto of the falling rupee have announced crises amidst operatic politics.
The spectre is back to haunt the economy in 2018. The dollar is over `68 and Brent crude prices are hovering between $75 and $80 per barrel, which is $10 per barrel higher than estimated in the budget—a rise by one dollar adds around `800 crore or about $120 million to the import cost, and more if the rupee slips further. The gap between exports and imports, dollar earnings and expenditure in 2017-18 was around $157 billion. Crude oil accounts for roughly a fourth of the imports.
The headline attention is on the cost consumers must now pay following 12 hikes—prices have touched the highest yet, and the per-litre price of petrol is `85.78 and diesel is `73.36 in Mumbai. The government, following public outrage, has promised a long-term plan to ease the price pain. There is talk about shifting petro goods on to GST to curb the current structure of ad valorem tax on tax. The state governments have been urged to cut VAT and there is some buzz about structuring subsidies.
All this is par for the course. There is no doubt the angst and anger is real. The issue is the grief of rising costs on the ground, but the bigger issue is the cost of vulnerability to the economy. Amidst the oil roil it would be pertinent to look at domestic output. India’s output of oil in 2017-18 dipped to 35.68 million tonnes—the lowest in six years. Can a $2.5 trillion economy with rising consumption and GDP afford to be dependent for 82 per cent of its needs on imports?
India’s tryst with oil exploration dates back to the 1800s. The global oil industry was born in August 1859, in a creek in Pennsylvania in the US. Eight years later, in 1867, oil was discovered in Digboi in Assam, digging started around 1889, and the first refinery was set up in 1901. After Independence, PSUs were set up to explore and produce to fuel the new republic. The big boost came with Bombay High and other discoveries followed when the sector was opened up post-liberalisation. The subsidy regime, through the years, thwarted expansion, investment and pricing of risk and reward.
Every five-year plan repeated the mantra of self-reliance, urging encouragement to national and international oil companies to explore oil and gas, suggested induction of new technology and set targets for higher domestic production. However, ambition has not translated into outcomes. The 12th Plan, for instance, had set a target of 216 MMT for crude oil production between 2012 and 2017. Actual production was 186.06 MMT. It is not just crude oil; the target for gas was 341 MMSCMD and the actual output was 173.88 MMSCMD—lower than the previous plan period. The reasons, the ministry told the Parliamentary Standing Committee, ranged from ageing fields to clearances to delays.
For sure there are many programmes for the sector and a plethora of acronyms—NELP, HELP, NSP, OALP, DSF et al. There is also the aspiration of bringing down import dependence by 10 per cent by 2022. The road map includes promoting energy efficiency, demand substitution, tapping biofuels and refinery process improvement. What about new discoveries? India has 26 sedimentary basins across 3.14 million sq km. Of this the government does not have geo data on nearly half or 1.5 million sq km. A National Seismic Programme is under way to map these areas. At the current pace, investment interest and output levels, the 2022 deadline seems unlikely to be met.
Could India learn some lessons from the United States on leveraging natural resources? Since 2001, the US government brought geopolitics into play in economic policy. It has promoted development and induction of technology to enable multiple methods of extraction, including fracking, and eased regulatory hurdles. Policy and market incentives combined to boost production and create thousands of jobs. At a fundamental geopolitical and market level the domination of Opec is challenged by the ability of shale producers to bring wells in and out of production as per pricing changes.
In less than ten years, the United States ramped up its oil output from 4.8 million barrels per day in 2008 to over 9.3 million barrels per day in 2017. Unsurprisingly, net crude imports to US slid from nearly 13 million barrels per day in 2006 to around 3 million barrels per day, the lowest since 1982. In March 2018, for the first time since November 1970, US output crossed 10 million barrels per day. The International Energy Agency estimates that the US could be the world’s largest oil producer in five years at 12.1 million barrels per day.
For sure the scale, geography and the geology are different. However, geopolitics and the consequences of dependence are not dissimilar for any economy. The way out of dependence is self-reliance. And India has substantial potential. In fact, the March 2018 report of the Parliamentary Standing Committee reveals that the estimate of “prognosticated conventional hydrocarbon resources” has gone up from 28.1 billion tonnes (oil and oil equivalent of gas) to 41.87 billion tonnes. The potential to reduce dependence on imports is there. This potential, though, has to be leveraged. This requires a champion, a C Subramaniam, and a fast-track email@example.com