WILL IT BODE WELL FOR MAKE IN INDIA?
By Subrata Majumder
Oil is the prime energy in the world. It accounts for 32 per cent of total primary energy supply in the world. Transport is the guzzler of oil energy. It consumes nearly 65-70 per cent of oil energy in the world. Crude oil price halved to fifty per cent with OPEC denying cut in production. The slide in crude oil prices is not short-lived. The fall will perpetrate with OPEC determined not to buckle down to any pressure to cut their production even if the price dropped to US $20 per barrel, said Mr Ali –ALNami, oil minister of Saudi Arabia.
In India, oil is an important factor to determine the health of the economy. It is pivot to external as well as domestic economic health of the country. Besides, oil is crucial for poor man’s energy. A large number of village population depend upon oil energy for lighting and cooking. Nearly 44 per cent of rural people depend upon kerosene for direct lighting and for back-up services.
India is oil import dependent country. Nearly 80 per cent of crude oil requirement is met by import. Domestic production of crude oil remains stagnant since last two decades. Transport is the main user of oil energy. It accounts for over 65 per cent of oil energy consumption.
Oil plays predominant role in nudging the external heath of the country. It is the key force to drive the current account deficit in the balance of payment. More than one-third of India’s imports is accounted by crude oil and petroleum products imports. Conversely in export also, it plays a key role. About one-fifth of India’s exports is accounted by export of petroleum products.
Given the sharp downturn in crude oil prices and assuming that the price will hover around US $ 65-70 per barrel in 2015-16, India is expected to save about US $ 18 billion. This should help India to reduce its widening trade deficit, resulting a cascading impact on current account deficit.
Subsidy containment is another area which will gain windfall from the drop in oil prices. In contrary to previous government’s penchant for subsidy economy, Mr Modi believes in subsidy-free growth model. Subsidy is a junk to the economic growth. It widens fiscal deficit and restricts government investment in infrastructure. The drop in crude prices will be propitious to Modi model of growth by slashing subsidy without much outcry from the voters. It will give a breath to policy makers to meet the phase-wise target for reducing fiscal deficit to 3 per cent within three years, which the Modi government committed in the budget. One –fourth of Central Government subsidy goes to petroleum products, such as kerosene and LPG.
However, oil is not the prime energy for manufacturing. Coal is the prime energy for manufacturing. Oil based electricity generation accounts for less than one per cent of total power generation capacity in the country. Only in the power shortage areas, diesel generating sets are used to supplement the power shortages for manufacturing. Given the high oil prices, the diesel gensets were the cost fueling for the manufacturers. Drop in oil prices will give them some relief.
Nevertheless, oil is important input and supplement to certain major manufacturing industries which are directly and indirectly related to Make in India mission. Directly, it will catalyze the growth of refineries, petrochemicals, fertilizers and indirectly it will have ripples on the resuscitation of growth in automobile industries.
Naphtha is an oil product, which is used as feedstock for fertilizer and petrochemicals. Around 25 per cent of the urea fertilizer plants in the country – an important fertilizer for the farmers – depend upon naphtha. Oil price drop will be a bonanza for the farmers. It is expected to slash the prices of urea. Downturn in fertilizer prices will spur the demand and is expected to woo the investors to increase the capacity of fertilizer.
Petrochemical is the main consumer of naphtha. Over 83 per cent of naphtha produced in the country is consumed by petrochemicals. Petrochemicals, such as plastics and polyvinyl, are emerging the most economically suited alternatives to metals. Plastic is one of the major seeds for the growth of SMEs in the country. Drop in oil prices, which will have impact on the naphtha prices, will be the windfall for the plastic industries. Thus, SMEs are expected to get a boost with the fall in oil prices, which will have impact on plastic prices.
India has the second biggest oil refining capacity in Asia and fifth biggest oil refining capacity in the world. From an import based country till early 2000’s, India has emerged as a major export country of petroleum products in the world. India is the third biggest petroleum product export country in the world , minus crude oil, after USA and Singapore. In the trade of merchandise products, more than one third of total imports of the country is accounted by crude oil and a little of petroleum products. Conversely, export of petroleum products, manufactured almost from the imported crude oil, account for one-fourth of total export of the country. A continuous fall in crude oil prices will gear up India’s opportunities to export more of petroleum products and will leverage to expand the refining capacity. This may attract the investors to set up more export based refineries in the country.
Automobile industry is another area which is expected to witness spur in demand. Automobile is one of the major industries in the country. It contributes 4 per cent to GDP of the country. Drop in oil prices is likely to boost the growth of automobile industry, which was wobbling since Lehman shock. In addition, fall in fuel prices will increase the export demand for car in the world. Currently, one-fifth of India’s car produced is exported.
Therefore, even though oil is not directly related to power energy, which is required to rev up the manufacturing in the country, drop in oil prices will impart impact on certain sectors of manufacturing industries also. These will prove beneficial for Make in India mission. (IPA Service)