Weak Gives India a Crude Shock

Despite the easing of global oil prices, the cost to India has been rising due to fall in rupee

    The steep depreciation in rupee in the past couple of months is worsening the problem of high crude oil prices for the Indian economy. Although, the global oil prices have somewhat eased recently, the cost to India has been going up. At a time when India is battling several woes such as high inflation, rising deficits and slowing growth, a combination of weak rupee and high crude prices could further complicate matters. 

After reaching a peak in April 2011, the global crude oil prices have eased subsequently. Accordingly, the average price for India’s crude oil basket at $106.9 in September and October was 4% below the average in the April-August 2011 period. However, in rupee terms, India’s net import cost in the past couple of months at almost . 5,200 per barrel turned out to be nearly 4% higher than the preceding four months.
It is not that the current global oil prices are at their historic peak or the rupee is at its historic low. Brent oil prices touched $143 in July 2008, while the rupee-dollar exchange rate had touched 52 in March 2009. FY09 witnessed India’s fuel under-recovery zoom above . 1,00,000 crore. The government then could afford to plug the hole with a huge heap of oil bonds. Things are different this time as both the perils — weak rupee and high oil prices — have come back to haunt the economy and the government lacks the firepower it had three years ago. It is already seen falling behind its revenue targets and overshooting expenditure targets and hence looking at a wider fiscal deficit. India imports around 80% of the crude oil it needs. Although, the country is a net exporter of finished petroleum products, the domestic consumption has been growing at a high pace. Since FY07, India’s consumption grew at a cumulative average growth rate of 4.1% to 142 million tonne in FY11 and is expected to grow 4.6% in FY12 to 148.3 million tonne, according to the petroleum ministry. This is more than twice the global growth in oil demand during this period. 
Rising global prices, apart from growing domestic consumption, have also created a huge fiscal burden on India as the costs are not fully passed on. According to the petroleum ministry’s estimates, India’s total petroleum under-recoveries for FY12 will be . 1,21,571 crore, if Indian crude basket averages at $110 per barrel for the whole year. However, these estimations were made in June 2011 when rupee-dollar exchange rate was . 44.85. The currency has weakened 10% since then. The industry lost . 64,900 crore in the first half of FY12 and . 272 crore daily in the first fortnight of October 2011. The rupee depreciation could necessitate an upward revision to the overall under-recovery numbers in the near future.
The composition of the Indian basket of crude is based on total industry processing of sour and sweet crude, including domestic output of crude. With Indian refiners improving their ability to process more and more sour crude oil — or crude oil with high sulfur content — the Oman — Dubai grades have gained weightage in the composition of Indian basket over the years. From 58% weightage in overall basket in FY06, the sour grades represented by Oman & Dubai grades now account for 67.6% since April 1, 2010. Naturally, the proportion of Brent crude in the Indian basket has fallen to 32.4%, from 42%, in this period.
Risk appetite returned to the markets in the past few trading sessions due to the Eurozone’s plans to bail out the Greek economy, while the rupee appreciated with FII money flowing in. On the other hand, this also boosted the international oil prices.
Looking at the fundamental picture, over the next 6-12 months, the oil prices could stagnate particularly with moderate global economic growth and rising oil production from the Gaddafi-less Libya and Iraq. The rupee’s fate will depend on how India is able to contain foreign investors’ worries about widening budget deficit and slowing economic growth. In this regard, what the government does with its mountain of fuel subsidy is something the world will be watching for. 

Digging Deep 
• In rupee terms, India’s net import cost in the past couple of months at almost . 5,200 per barrel turned out to be nearly 4% higher than the preceding four months

• Since FY07, India’s consumption grew at a cumulative average growth rate of 4.1% to 142 MT in FY11 and is expected to grow 4.6% in FY12 to 148.3 MT

• India imports around 80% of the crude oil it needs