Of all the adverse externalities that India needs to tackle on the economic front, an oil shock—in the form of a prolonged spike in global prices of crude petroleum and its derivatives—is one that has tested its resilience the most. An oil shock practically amounts to an external tax on the Indian economy as it leads to a reduction in the net income of the nation. Unfortunately, things are only going from bad to worse, with the country’s already-huge import dependence for fuel rising relentlessly. As global prices remained elevated, the oil import bill jumped to $47.5 billion in the June quarter, nearly 40% of the level in the whole of FY22. While the prime minister laid out a road map in 2015 to reduce imports’ share in domestic fuel consumption from 77% to 67% by 2022 and further down to 50% by 2030, it has only steadily risen to the current level of 87%. Domestic production of crude oil, on the other hand, has declined in recent years.
India’s policymakers used to formulate various paradigms to “manage” the adverse effect of high oil imports on the economy, all guided by the notion that a complete pass-through of cost to consumers via hikes in the prices of auto fuels and cooking gas should be avoided. But these products have also been taxed very heavily, an instance of inverted logic. The oil burden used to be shared among the Union Budget, government-owned oil companies and the consumers. In recent years, prices of petrol and diesel have, however, been formally decontrolled and pass-through of costs to LPG users, including households, has been eased. However, tacit controls on prices to the consumer still exist. Irrespective of how the burden of energy costs is distributed, it is the taxpayer who bears the brunt finally. According to the International Energy Agency, India’s oil demand is projected to rise 80% from the current level by 2040. And this forecast factors in the energy de-carbonisation policy.
The government has indeed exerted itself to solve the oil conundrum despite the challenges of the political economy. However, these initiatives have clearly proven to be unequal to the task—domestic output fell from 35.7 million metric tonne (MT) in FY18 to 29.7 MT in FY22. Obviously, India’s proven hydrocarbon reserves pale in comparison to that of oil-rich countries, and for this and other reasons like a high incidence of taxes (levies are nearly half of the sale prices of crude and auto fuels), the already-limited foreign participation in the exploration sector has only dried up in recent years. Policy fiascoes like the aborted attempt to extract huge amounts as capital gains tax from Cairn Energy, too, have dampened investor enthusiasm. The short- to medium-term strategy for cost-effective transportation fuels must include faster adoption of EVs with attendant infrastructure for battery production and charging. Also, given the tepid investor response in exploration, producing assets like ONGC’s Mumbai High offshore fields may be transferred to global oil firms, which could potentially multiply output in a short span of time. Lower taxes on fuels will boost the economy’s competitiveness, and thereby tax receipts and foreign exchange inflows, helping mitigate the adverse effect of the proxy external tax on the country to a large extent.