BITTER CRUDE

As Modi goes to Davos, oil is not well with India

Quartz india
Quartz india

Prime minister Narendra Modi is in Davos to hard sell India as the world’s most attractive investment destination. But suppressed crude oil prices—the big joker in the pack that has in recent years helped India fix its finances—may spring an ugly surprise in 2018.

Fuel consumption in India is set to double this year, after having been throttled last year by an acute cash crunch and increased taxes. This bottled-up demand for fuel may spill out at a time when crude oil is getting dearer by the day.

India’s per-day fuel demand is pegged at 190,000 barrels in 2018, up from last year’s 93,000 barrels, according to a report from energy research and consultancy firm Wood Mackenzie.

This will increase imports, on which India relies for 80% of its fuel needs. Oil imports made up over a fifth of India’s total import bill in April-November 2017, and grew by 22.6% compared to a year earlier. Rising imports, thus, will widen India’s trade deficit, and if global prices continue to soar as they have in the last few weeks, New Delhi’s fiscal math will go awry and will need to be reworked.

Wider deficits will weaken the government bonds as well as the rupee. If the government borrows more from the market to meet its expenses, that will leave less money for private investors. Higher interest rates would ensue, making bank loans less attractive for investors. Already starved of private investments in production capacities, any further slump will dent India’s economic growth potential.

The second whammy will be rising prices. Dearer fuel directly affects inflation, which is already on an uptrend in India. Higher inflation will cue the central bank to increase interest rates—the following vicious cycle will lead to underwhelming economic growth, at best.

The spike in India’s oil consumption in 2018 could be cyclical as last year was particularly slow for all categories of consumption—the 2.3% fuel demand growth in 2017 was the slowest in three years. This is because the November 2016 note ban sucked out 86% of all money (by value) in circulation. Indians had barely recovered from that shock when the goods and services tax was rolled out, adding to the fuel consumers’ burden.

“India is set to contribute to 14% of the global demand growth in 2018. Diesel and LPG will be the two main drivers,” Aman Verma, Asia-Pacific research analyst at Wood Mackenzie, said in the report.

Pent-up demand

The pent-up demand in the economy is most visible in areas like vehicle sales, which indicates higher fuel consumption in 2018. In the April-December 2017 period, passenger-vehicle sales grew by 8.13%, commercial vehicles by 15.19%, and two-wheelers by 11.76%, compared to the corresponding periods last year, data from the Society of Indian Automobile Manufacturers show.

Fuel demand was also choked by high retail prices in 2017. Government policy remains a key factor even in India’s deregulated fuel market. While the central levy on fuel has been reduced, it is still nearly double that of three years ago. With the 2019 general elections approaching, the Modi government is unlikely to let consumer anger fester. It may bring down the levy further as recent spikes in crude oil have led to record retail prices for diesel.

India’s three biggest fuel retailers—Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp—are state-owned and all three are fettered by the government’s political compulsions. At a time when crude oil prices have jumped 45% in recent months, India’s retail fuel price went up by between 9% and 11%.

Cylinders for all

The rise in price and demand for diesel is only one of the risks. Cooking gas could pose the other big challenge. Wood Mackenzie expects continued momentum in liquefied petroleum gas (LPG) sales in India at 40,000 barrels a day in 2018, after a sharp jump of 60,000 barrels a day in the previous year. The big thrust has come from the government scheme that aims to promote cleaner cooking fuel in rural India. Going into an election year, it’s only expected to rope in more homes.

“The phenomenal growth in LPG usage has reduced India’s self-sufficiency of LPG to 50% from about 70% in 2013. Higher imports could also mean an opportunity for US LPG to gain market share in India, traditionally dominated by Middle Eastern suppliers,” Verma said.

Indeed, the World Bank has pegged India as potentially the fastest-growing economy for the next three years. Its fiscal strength and demographic advantage make for a good promise, but surging oil prices and a simultaneous spike in fuel consumption is a potent mix that will make the economy totter as it tries to make a dash.

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