India's Crude Oil Import Dependency Jumps Under Modi - vrk100 - 25Sep2023

India's Crude Oil Import Dependency Jumps Under Modi

 

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(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)  

 

(An update dated 02May2024 with new data is attached at the end of the blog)

 

Under PM Modi government, India's crude oil import dependency has jumped by 10 percentage points from 77.6 percent in 2013-14 to 87.5 percent in 2022-23.

It is hoped that India growth in future is going to be superior among the emerging markets (EMs). However, one of India's biggest weak points is lack of energy security and high crude oil import dependency.

 

Energy security is one of the most important things for any country. How is India doing on this front? We all know India is highly dependent on imports for crude oil. Government data show that India's import dependency for crude oil has been rising at alarming rates in the past decade.

 

 

 

Clean energy transition

Due to climate crisis and other environmental concerns, many countries across the globe have, over the years, rightly focused on non-fossil fuels and alternative clean energy sources as part of the green agenda.

 

The transition from fossil fuels to renewable energy is slow and tortuous, because renewable energy is more expensive though the prices of wind and solar power have come down in recent years.  

Before we do a reasonably decent level of energy transition, the poor globally will have to pay a heavy price, as all goods and services will become costlier in the absence of cost-effective sources of clean energy.

In recent years, the world has recognised the long-term use of fossil fuels as many green / greener fuels have not lived up to the hype and expectations. 

 

For long, no new significant investments have been made in extracting fossil fuels or developing new oil fields due to a slew of factors -- like, encouragement of clean energy by governments, penalties on fossil fuel production, green taxes, banks' unwilling to lend to fossil fuel projects and others.

 

As argued by several experts, green energy transition may not be possible on currently available technology and oil is likely to continue with us for longer time than people expect. Poorer countries like India (on a per capita income basis) may still have to depend on fossil fuels for several more years.

 

After Russia's invasion of Ukraine in February 2022, crude oil and other energy prices have been volatile globally. But now crude oil prices are elevated and at their highest level in the past one year, with the WTI crude oil quoting around USD 90 per barrel and Brent crude quoting at USD 94 per barrel.

As Europe stopped importing oil and gas from Russia, European nations, including the UK and Continental Europe, faced severe energy crisis last year, pushing up energy prices substantially for European citizens.

 

Combating climate crisis and promoting global energy transition took a backseat with soaring energy prices (Europe largely depended on Russian gas and oil till early 2022).

 

Now, there seems to be some pushback against timelines of the green agenda. Last week, the UK prime minister Rishi Sunak announced the postponement of a ban on selling diesel and petrol cars from 2030 to 2035 -- the move has been criticised within the UK as well as outside.

India's import dependency

 

Last year, India could escape the fate of higher oil / gas prices in Europe, by importing crude oil cheaply from Russia -- benefiting immensely from the European boycott of Russian energy.

Higher oil prices now have put India in a delicate situation. As it is India's consumer price inflation (CPI) is at elevated levels for more than three years. A combination of factors have put pressure on India's fiscal deficit.

Indian consumers have been burdened with high fuel prices -- not only for petrol, diesel and liquefied petroleum gas (LPG), but also for other petroleum products.

Gains in the past from lower crude oil prices, between 2014 and 2020, were not passed on to end-users, burdening Indian consumers. Nobody knows where the gains have gone. Nor have the gains been spent on shoring up India's strategic petroleum reserves (SPR).

Under PM Modi government, pump prices for petrol and diesel have gone up substantially aided in part by higher taxes on these fuels.

 

As can be seen from table 1 below, India's crude oil import dependency jumped by 10 percentage points, under PM Modi government, from 77.6 percent in 2013-14 to 87.5 percent in 2022-23. 

Why has PM Modi government failed to decrease India's import dependency and improve India's energy security? The answer lies in decrease in domestic crude oil production.

 

Crude oil output

Table 2 below reveals that India's domestic crude oil production fell by a staggering 22.8 percent from 37.8 million metric tonnes in 2013-14 to 29.2 million metric tonnes in 2022-23 (you can look at full data for the past 10 years in table 3 provided at the end of the blog).

Public sector undertakings (PSUs) have done less worse than their private sector counterparts. PSU oil companies output fell by 9.7 percent in the past nine years, whereas that of private sector fell by 48 percent.

Over the years, state-owned ONGC and Oil India have failed to ramp up oil output. Their combined oil output peaked at 29.8 million metric tonnes in 2004-05, and now slumped to 21.6 million metric tonnes.

Problems were created by successive Indian governments for private sector oil giants, like, Cairn Energy (now under Vedanta Limited) -- by imposing taxes over and above mentioned in purchase and production sharing agreements.

Renaming of previous government's policy for boosting crude oil output has not helped matters anyway. India's current federal government changed the policy name from New Exploration Licensing Policy (NELP) to Hydrocarbon Exploration Licensing Policy (HELP) in 2016.

 

Foreign players have shown little interest in oil exploration in India in recent decades due to capricious policies of successive governments, like curbing oil exports out of India from Cairn India's (now part of Vedanta Limited) Rajasthan block, retrospective taxation of Vodafone in 2012 and others. 

Overall, the contribution of PM Modi government to India's energy security has been negative all these years.

To sum up, the policies of the present government have failed to stimulate new investments in increasing crude oil production. 

 

In this setting it's interesting to note that India at the Glasgow Climate Change Conference in November 2021 pledged to cut its carbon emissions to net zero by 2070.

But before that, India needs a boat load of energy sources to increase its economic growth in the backdrop of India's aspiration to become a global giant at least economically. 

 

India will have to tread a cautious and balanced path between its ambitious goals of net zero by 2070 and becoming a global economic giant. Unless the country achieves some sort of 'energy security,' it's not clear how it can attain its economic and global aspirations in future.

 

- - -

P.S.: The following are added after the blog was written on 25Sep2023:

 

P.S. dated 02May2024: India's oil import dependency was 87.4 per cent during FY 2023-24, as per latest data from PPAC, a Govt of India body. The ratio was much higher compared to 77.6 per cent during FY 2013-14.

 

 

Additional data:

 

Table 3 showing India's crude oil output from 2013-14 to 2022-23 >

 

 

Tweet 12May2020 and image showing crude oil output from 1998-99 to 2019-20 >

 

screenshots from PPAC India's Oil & Gas Ready Reckoner - PDF for 2022-23 

 

  and Aug2023 monthly reckoner 

 Tweet thread (Posts on X) dated 03Jul2021

Tweet thread dated 12May2020

 

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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Market Outlook-VRK100-11072011

Market Outlook

Rama Krishna Vadlamudi, HYDERABAD July 11, 2011

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www.scribd.com/doc/59759489

When you thought the markets were poised for a breakdown, just the opposite happened. During the middle of June 2011, the sentiment on Indian equities was very weak and most of the market people expected the stock indices to go lower. But, in a matter of one week, the sentiment turned positive suddenly, following a couple of events. When I wrote the ‘Market Outlook’ almost a month ago, I suggested that market would climb down from 18,000 Sensex level to 17,000 levels. Against my expectation, the Sensex rebounded and closed at 18,858 last week.

During the first week of this month, equities staged a rebound led by inflows from Foreign Institutional Investors (FIIs) following the Government’s decision to hike prices of heavily-subsidized diesel, kerosene and LPG. Added to the positive sentiment were: the sharp decline in international crude oil prices; and the decision by the International Monetary Fund (IMF) and the European Central Bank (ECB) to give an aid of USD 170 billion (120 billion euro) to Greece to help it out of the sovereign debt crisis.

What investors ignored

Investors, rather traders, seemed to have ignored a variety of factors. The south-west monsoon seems to be weak with the India Meteorological Department (IMD) suggesting that rainfall so far is deficient in several met sub-divisions of the country. The IMD estimates that rainfall, during this kharif season, may be five per cent below the long-term average. Inflation is at elevated levels though food inflation seems to be on the bend. Food inflation is down to 7.6 per cent due to a high base effect of last year. The policy drift in India continues with the government not being able to go ahead with policy reforms.

Commodities

Commodities prices have come off their peaks in the last one month. After touching a low of $ 90 per barrel, the Nymex crude oil rebounded to 98-level before ending the week at $ 96 per barrel. The upheaval in Libya, Syria and other Middle East countries and the supply-demand gap are likely to drive crude oil prices to higher levels in the following months. Gold prices rose to $ 1,530 per ounce while silver ended the week at $ 36 per ounce. In Mumbai, gold was quoting at around Rs 22,000 per 10 gm and silver at Rs 54,200 per kg. World cotton and wheat prices have fallen 20 per cent off their recent peaks.

Global cues

The US unemployment rate rose unexpectedly in June 2011 from 9.1 per cent to 9.2 per cent. The US jobs data softened the commodities prices. The European Central Bank raised its benchmark interest rate from 1.25 per cent to 1.5 per cent for the second time this year. China raised its benchmark interest rates for the third time this year from 6.31 per cent to 6.56 per cent. Europe continues to be troubled with its sovereign debt crisis prompting Moody’s to cut Portugal’s credit rating by four notches to ‘junk’ status.

Amidst all the gloomy news, the Nikkei – Japanese benchmark stock index, crossed 10,000 last week. Interestingly, the Nikkei was at 10,000-level when tsunami hit Japan on March 11, 2011. It is expected that Japanese companies are recovering well from post-tsunami supply chain disruptions.

Foreign Flows

Foreign Institutional Investors (FIIs) have brought in USD 1.3 billion or Rs 5,700 crore in this month alone to the Indian stock markets. The total inflows from FIIs are at USD 2.7 billion or Rs 11,700 crore for this calendar year, as per SEBI data. The Indian stock prices are heavily influenced by FII flows.

As per Reserve Bank of India (RBI) data, foreign direct investment (FDI) in India has fallen by 62 per cent to $ 7.1 billion in 2010-11 from $ 18.8 billion in 2009-10. The steep fall is attributed to a variety of reasons, like, weak investment climate in India following the issues surrounding corruption which has dented country’s image among foreign investors, slow government decision making in business deals such as Vedanta Resources acquisition of Cairn India, and policy issues in government’s new exploration licensing policy (NELP).

India’s Exports and Imports

India’s exports have been growing rapidly in the last six months. Data from the commerce ministry shows that merchandise exports in June 2011 grew strongly at 46 per cent to $ 29 billion led by engineering, oil, gems & jewellery, and cotton yarn; while imports rose to $ 42 billion led by crude oil, precious metals, gems and machinery.

Current account deficit (CAD) for 2010-11 stood at $ 44.3 billion representing 2.6 per cent of India’s gross domestic product (GDP). This is much higher than the $ 38.4 billion deficit, 2.8 per cent of GDP, recorded in 2009-10.

Hauling over the coals

The draft mining bill proposed by the government spooked the stock price of Coal India. The bill proposed that Coal India should share 26 per cent of its net profit with the people affected by the project. The proposal will adversely affect the profits of Coal India in future. As a result, the stock price of Coal India nosedived by eight per cent on July 9th and closed at Rs 362 per share. The draft bill is likely to negatively impact others firms, like, NMDC and Sesa Goa, though the impact on these iron ore miners may be lesser compared to Coal India. A peculiar feature of Indian stock market, of late, has been that whenever the Government eyes a particular sector, the stocks in that particular sector are falling heavily. Markets, in general, do not like government intervention or control/regulation. Previously, the telecom sector was beaten down in a similar fashion.

Banking results

Banks were the first to announce their first quarter (April to June 2011) results heralding the start of results season, which opened on a positive note. HDFC, the country’s biggest housing company, clocked a 22 per cent rise (quarter on quarter) in net profit to Rs 1,176 crore boosted by a healthy loan growth of 22 per cent. HDFC says the demand for housing loans is strong despite rise in interest rates. Mid-sized private sector bank, IndusInd Bank has shown a good 52 per cent rise in net profit spurred by healthy growth in non-interest income and reduced interest costs.

In other developments, State Bank of India, India’s biggest lender, has raised its base rate and benchmark prime lending rate (BPLR) by 25 basis points (0.25 per cent) each to 9.5 per cent and 14.25 per cent respectively. SBI raised deposit rates also. Several banks, including ICICI Bank, IOB and Corporation Bank, have increased their lending rates in the last one month following a series of rate hikes by Reserve Bank of India.

Banking sector seems to be bogged down with large spike in bad loans prompting the finance minister, Pranab Mukherjee to direct the public sector banks to exercise due diligence in sanctioning of new loans and taking necessary steps for recovery in bad loans. It is no wonder that the stock market finds the stocks of public sector banks unattractive compared to private sector banks. Media reports suggest that SBI is planning to raise overseas debt of $ 5 billion as its biggest stakeholder, Government of India, seems to have no interest in investing in SBI through rights issue. The government is facing funds crunch as fiscal deficit’s target for the current financial year appears to be a difficult achievement.

Reserve Bank of India has imposed a penalty of Rs 25 lakh on Citibank for violating Know Your Customer (KYC) norms. Earlier this year, the foreign bank’s relationship manager reportedly duped several corporate customers. Due to the fraud, the bank’s customers had lost hundreds of crores of rupees.

Insurance

The regulator of insurance sector, Insurance Regulatory and Development Authority (IRDA) has imposed a penalty of Rs 70 lakh on SBI Life Insurance Company for violation of guidelines on group insurance policies.

Direct Cash Transfer

The Central Government is proposing to transfer subsidies, like, fertilizers, kerosene, cooking gas, and food grains worth thousands of crores, to the needy consumers directly. As per a task force, headed by Nandan Nilekani, the government will directly transfer cash to the consumers with the help of Aadhar-linked bank account. Aadhar is a unique identification number being given by the Unique Identification Authority of India (UIDAI), a government body. The UIDAI has already issued one crore Aadhar numbers in the last nine months.

What lies ahead?

The continuing uncertainties in Europe over sovereign debt will keep the prices of commodities under check. Other factors that are negative for commodities are the unexpected rise in unemployment rate in the US and rising interest rates in China and India, two of the top importers of raw materials. Even the ECB is going to raise its interest rates further in future. However, due to fundamental factors and the political unrest in the Middle East, crude oil is likely to go up.

The important stock indices around the world have rallied in the last one or two weeks. Last week, the Sensex closed at 18,858 and the Nifty at 5,661. Last week’s closing levels for world indices are: Dow Jones – 12,657; S&P 500 – 1,344; Nasdaq – 2,860; FTSE 100 – 5,991; Dax – 7,403; Hang Seng – 22,726; and Nikkei – 10,138.

In the short term, Indian stocks are looking to be in an uptrend led by strong FII inflows. The quarterly results also may give some positive surprises, especially from private sector banks, pharma, metals and consumption-oriented sectors. However, the long term trend for Indian stocks is hazy due to concerns on problems being faced by the central government, weak south-west monsoon, inflationary concerns and the possible decline in GDP going forward. Overall, these are interesting times for Indian stock markets.

Disclaimer: The author’s views are personal. The author has a vested interest in the stock markets. Before taking investment/trading decisions, consult your personal certified financial planner/adviser.