India?s export profile gives the impression that it is an energy surplus country. However, almost everybody knows it to be otherwise. Then why does it export so much of refined petroleum products?
During the year 2008-09, India?s petroleum exports stood at $26.8 billion. These exports were 14.7% of the country?s total annual exports. They were also the second-highest exports in value terms closely following gems & jewellery exports, which were worth $27.7 billion. In the previous year, petroleum exports were India?s topmost exports at $27.4 billion and a share of 17% in total exports. The lower export value of petroleum products during 2008-09 is for obvious reasons. The global economic downturn from September 2008 affected prospects of such exports, particularly in India?s main export markets such as in West Asia (e.g. UAE and Saudi Arabia) and Europe (e.g. the Netherlands and Germany).
Notwithstanding the downturn in 2008-09, petroleum products continue to remain India?s main exports. This is puzzling since India imports almost 80% of its crude requirements. India does have a surplus balance in refinery production, mostly on account of its refineries working overtime. Capacity utilisation in Indian refineries?be it in private or public sector?is well above 100%. This is an activity where India?s public sector has been matching its private counterpart in equal measure. But do India?s refineries function beyond their capacities for meeting domestic consumption or exports?
There is no unambiguous answer to the question. Motivations for producing more for domestic consumption or exports are guided by the prevailing incentive structure in the domestic refined petroleum market. These motivations, again, are different between the public and private refiners.
With retail prices of domestic petroleum products continuing to be controlled, the incentives for private refiners are very different from those in the public sector. Private refiners cannot afford to sell their products at controlled prices. As a result, when operating costs increase, primarily because of increases in global crude price, they have no option other than passing on the increase to consumers through higher retail prices. However, with public refineries not doing so, the private refiners become uncompetitive in the domestic market. Thus, they have no option other than scouting overseas markets.
Diversion of output to overseas markets creates supply shortages in the domestic market. India?s public refineries do not respond to market signals and rarely align retail prices in line with changes in global prices. They take hits on their balance sheets in the hope of getting saved by oil bonds. But they have to respond to the growing demand for refined products by producing more. Their efforts are inadequate for meeting the rising demand forcing them to import refined products.
The distorted price-incentive structure in the domestic market creates a piquant situation where India is found exporting and importing the same petroleum product. High speed diesel (HSD) is a typical example. In the year 2008-09, India exported 13,770 thousand tonnes of HSD while importing 2,734 thousand tonnes of the same. The imports would have been more had deceleration not affected the Indian industry. In order to respond to the challenges of higher demand, several segments of Indian industry, particularly small & medium enterprises, have been overcoming problems of irregular power supply by installing large captive diesel-driven machine supplies. The use of these diesel sets is typically more during summer. As industry grows and the demand for diesel grows, imports also grow. Another product where similar simultaneous exports and imports are observed is fuel oil.
The mystery of petroleum products becoming leading exports from a country lacking crude supplies is explained by the perverse incentive structure in the domestic market. Export of petroleum products is, therefore, more by default than design. If market distortions have created such strange ?synergies? of export and import of similar petroleum products, then is there a case for encouraging cheaper refined imports? The public refineries are not only bleeding from administered prices but are also having to pay for imported refined products. Rather than subjecting them to dual torture, it may be sensible to encourage them to reduce production costs and look out for cheaper imports. That may save some blood for them. Alas, there?s little that this will do for private refiners. Given the way things are, they should rather be encouraged to export and earn more.
The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views