The oil factor

In spite of global uncertainties, India's oil economy offers an opportunity to usher in reforms in the petroleum sector

As 2023 comes to an end, it is customary to look back at the year that is going by and try to draw from it the right lessons that should hopefully help us negotiate the challenges of 2024.

The Indian economy in 2023 performed reasonably well. Its gross domestic product, or GDP, grew by 6.1 per cent, 7.8 per cent, and 7.6 per cent in the first three quarters of 2023, respectively. And if the Reserve Bank of India’s (RBI’s) projection of 6.5 per cent growth for the fourth quarter of 2023 is any indication, the full year will have seen an average growth rate of 7 per cent.

There will always be legitimate questions on the nature of this smart recovery and whether this growth should have given a bigger boost to employment in the country, even though the latest job numbers, put out by the government, show an improvement on all key parameters. There are also questions on whether the recovery is fuelled principally by the organised sector, while the large unorganised sector may have neither gained much from the revival nor contributed to it. But even otherwise, a GDP growth rate of 7 per cent in a year of turmoil is a commendable achievement for a large economy like India.
 

Government finances have been kept under control. The Centre’s fiscal deficit was to be reined in at 6.4 per cent of GDP for 2022-23, down from 6.7 per cent in 2021-22. When the actual numbers came out, the deficit for last year turned out to be lower at 6.36 per cent, partly because of a higher nominal size of the economy. The performance in the first half of 2023-24 has been better. Against the annual target of 5.9 per cent, the deficit at the end of September 2023 was estimated at 4.9 per cent.

Even the states have performed creditably by keeping the deficit in check. Their combined fiscal deficit in 2022-23 was 2.8 per cent of GDP, the same figure as was reached in 2021-22. Additionally, the Centre as well as the states has done well by increasing capital expenditure, whose healthy rise has helped in keeping the economy’s growth engine in good shape at a time the private sector’s investment has not yet seen the expected pace of revival. Tax revenues have also seen a healthy rate of growth for both the Centre and the states. This too has helped improve government finances.

The track record in managing inflation in 2023 has been mixed. While wholesale prices rose marginally in the first three months of the year, they kept falling in the following seven months before registering a small increase of less than 1 per cent in November. In contrast, the retail inflation rate consistently stayed above the target of 4 per cent in all the 11 months of 2023, but showed signs of moderation. However, in only four of these months (January, February, July, and August), the retail inflation rate was above the upper band of tolerance, set at 6 per cent. This is why the RBI’s Monetary Policy Committee has maintained a pause on any further hike in interest rates since it last raised the repo rate to 6.5 per cent in February 2023.

In many ways, all these parameters for the Indian economy are not surprising. The big surprise of 2023 is the way the international crude oil market has behaved during this year. Note that India’s dependence on international crude oil has been on the rise and imported crude oil met as much as 88 per cent of the country’s total consumption during the first eight months of 2023-24. This was 87 per cent in 2022-23 and lower at 85 per cent in 2021-22.

And yet, this caused no extra pressure on India’s external account in 2023. Indeed, the country’s crude oil import bill in the first eight months of 2023-24 fell to $87 billion, down by 23 per cent over the same period of 2022-23. This relief was unexpected. The year saw geopolitical tensions at their peak with the Russian invasion of Ukraine and later the Israeli offensive in Gaza. In the past, any international crisis would lead to a spurt in crude oil prices and India’s oil import bill would soar. Even as the average price of Brent crude oil (which India mostly uses) rose from $65 a barrel in 2006 to $72 in 2007 and further up to $97 a barrel in 2008, India’s oil import bill on this account rose from $48 billion in 2006-07 to $68 billion in 2007-08 and to $77 billion in 2008-09. Something similar happened in 2010-11 and 2011-12, when Brent crude oil prices had risen again.

But what happened in 2023 was quite unusual. Of course, average Brent crude oil prices fell from $101 a barrel in 2022 to $83 a barrel in 2023. But along with that came the Russian oil bonanza. Russian Urals for many months of 2023 accounted for more than a third of India’s total crude oil imports. Thus, India’s total oil import bill fell sharply in 2023. In the recent past, crude oil prices have always been a major source of worry for managers of the Indian economy. In 2023, those appear to be less of a concern even though the world has been in turmoil.

As a result, India’s oil economy is enjoying a relative calm. The government is not unduly worried by any additional pressure on its oil subsidy bill, except a little bit of a rise in its subsidies for fertilisers. Oil companies continue to enjoy a decent gross refining margin. In the first half of 2023-24, it is lower than the level that prevailed in 2022-23, but it is still higher than what it was in 2021-22. Post-tax profits of state-controlled downstream oil companies (marketing) in the first half of 2023-24 have skyrocketed to over Rs 57,000 crore, compared to just about Rs 1,100 crore in the whole of 2022-23. Although the post-tax profits of state-controlled upstream/midstream and standalone refineries have dipped significantly in the same period, they are still earning profits.

But this situation should not lull the government into complacency. Remember that India’s domestic crude oil production has remained flat and is hovering at 27-28 million tonnes in the last two years. There are no signs of a pickup in domestic crude oil production in 2023 as well and the policy of encouraging oil exploration has not yet yielded results. This is the right time for a fresh review of why such policies have not made an impact so far. This is also an opportunity for the government to introduce much-needed pricing reforms in this sector. State-owned oil-refining and distribution companies enjoy pricing freedom only on paper. Now that all of them are earning profits, the government should give them pricing freedom. That will also help revive the idea of privatising a few of the state-controlled oil companies.