Gujarat state has emerged as India’s main energy and industrial
hub. Between 2002 - 2014, its economy grew at an average of
nearly 10% per year, exceeding the national average by more than
3%.
Even more important than the praise from the IMF and World
Bank, Modi has drawn huge endorsements from China and Japan
who are also eager to court India’s political allegiance. After
meeting him last year, the leaders of the two Asian rivals pledged
to each invest tens of billions of dollars to jumpstart the Indian
economy. China said it will pump in a total of US$20 billion in
new investment through 2019 while Japan has promised loans and
investments amounting to US$33 billion.
However, Modi’s charmed start as leader of the world’s largest
democracy could soon face a reality check from the Congress
Party, which remains a powerful political force in opposition and
rising oil prices since the start of the year.
As part of an attempt to solve the country’s decade long
energy crisis, Modi’s government made an unexpectedly
dangerous decision in March to arrest his predecessor and other
powerful politicians to face corruption and criminal conspiracy
charges related to the coal industry. Manmohan Singh, who was
Prime Minister from 2004 - 2014, held the coal portfolio from
2005 - 2009 when most of India’s coal deposits were awarded
to well-connected business and political allies. An official audit
found the deposits were given away or sold cheaply, costing the
government billions of dollars in revenue.
On the economic front, the manufacturing sector will not
make major long-term investments to underwrite a sustained
recovery as it continues to face electricity shortages. The IMF has
added to the ‘to do’ list with a call for India to invest US$1 trillion
to expand and upgrade its inadequate infrastructure through the
decade.
The World Bank agrees, stating that New Delhi should
spend less on fuel subsidies in favour of infrastructure
development. While India expects to slash its fuel subsidy bill to
300 billion rupees in the current fiscal year from 700 billion rupees
two years ago, the bank wants the cuts accelerated in view of
current low oil prices.
As a timely reminder of its fragile oil-dependent economic
revival, India suffered a trade deficit in fiscal 2014 despite the
enormous lift provided by falling energy prices for nearly nine
months.
Lower oil prices failed to reverse trade deficit
in 2014
Weighed down by sluggish exports, India reported a wider
merchandise trade deficit for the last financial year to 31 March,
2015. The windfall provided by nine months of lower oil prices
was largely expended on other products.
Measured by the Indian currency, the deficit rose nearly 3.3%
from FY2013 to 8.37 trillion rupees in FY2014, while in US dollars,
it slipped by 0.9% to just over US$137 billion, said the Ministry
of Commerce and Industry. The rupee fell slightly against the US
dollar from around 61 last April to 63 at the end of March.
The country’s import expenditure rose about 0.69% from just
under 2.72 trillion rupees in FY2013 to over 2.73 trillion rupees last
year. But in dollar terms, it fell 1.23% from US$314.4 - 310.5 billion.
Sharply lower oil prices had helped India reduce its oil
expenses by nearly 16.1% from US$164.8 billion in FY2013 to
US$138.3 billion in FY2014. But it could not prevent the financial
year ending with a disappointing trade deficit due to a surge in the
purchase of machinery, electronic goods, chemicals and transport
equipment to support manufacturing and general economic
activity. Non-oil imports rose nearly 8.4% to US$309.3 billion in
FY2014 from US$285.4 billion the previous year.
Perhaps of greater concern is that Indian exports fell in FY2014:
down by 1.23% from US$314.4 billion to US$310.5 billion, or by
0.42% from 19 trillion rupees to 18.97 trillion rupees.
In the medium term, the government has set an ambitious
target for the country’s exports of goods and services to nearly
double from US$465.9 billion in FY2013 to US$900 billion in
FY2019. Over the same period, it wants India’s share in world
exports to rise from 2% to 3.5%.
The State Bank of India (SBI) expects the nation’s export sector
to benefit from its industries’ improving competitiveness, a stable
currency, and growing international demand for Indian products.
The SBI had issued its forecast on the back of good news that
India’s current account deficit had fallen to less than US$24 billion
or around 0.9% of GDP in FY2014 compared with 1.7% in FY2013
and 4.8% in FY2012. The current account balance is the broadest
measure of a country’s trade with the rest of the world.
The problem with the SBI’s plan is that it assumes oil, gas
and coal prices will remain cheap at or near current levels. India’s
economy is sensitive to sharp energy price swings. High energy
prices contributed to the downfall of the previous government,
and could yet undermine Modi’s reform agenda if oil continues its
revival.
To lessen the risk of a future oil shock, Modi has set a target
for India to slash its oil and gas import dependence from 77% now
to 67% by 2022.
Taking a page from China’s playbook, he said India’s state and
privately-owned companies should boost access to oil and gas
supplies by developing energy corridors in strategic parts of Asia,
and natural gas resources in North America and Africa.
He told an energy conference in New Delhi in April that
Indian companies have an important role in supporting the
country’s diplomacy to help improve its energy security. By
actively participating in oil and gas ventures abroad, he said Indian
firms will boost their own reserves and production, and help the
country reduce spending on imports.
Led by the major products of gasoline, diesel and jet fuel,
India’s oil consumption is set for a mini-revival in the current fiscal
year to March 2016, said the petroleum ministry. It expects the
country’s total products consumption to rise by 3.2% to nearly
3.6 million bpd to follow on from the previous year’s 2% increase.
Diesel, which accounts for 40% of India’s oil market, will see a
4.1% rise to 1.46 million bpd while gasoline demand will be the star
performer, rising by over 7.2%.
India may court foreign investment to help
build strategic oil stockpiles
As another of Modi’s reform initiatives, India is looking to open
up its protected oil storage sector to foreign investments to
jumpstart a long-delayed programme to build strategic reserves.
With no stockpile to show after years of planning, the new
government recognises that India lacks the expertise and capital
to build, store and maintain oil reserves, and needs to move
quickly to take advantage of the current period of low oil prices.
Shortly after taking office last year, the government began
discussions with state-owned oil firms of Middle Eastern
14
World Pipelines
/
JULY 2015
