How Important is oil to India’s Development?

India’s energy policy is very critical to the growth of the country. The country imports 85% of its oil and has been importing coal too in recent years. Recently we saw a huge rise in the prices of diesel and petrol in the month of May & June 2020 due to increase in excise duty. There was a consecutive increase in the prices of same for many days. Even for the first time in the history of India, diesel costs more than petrol i.e. petrol costing Rs 79.76 and diesel costing Rs 79.88 per litre (Delhi Rate). Now question arises that what caused such unprecedented rise in the price of Petrol and Diesel when crude is quoting below $40? Has the Government changed its tune on unconventional fuel and threw development of electric cars to the back burner?

To answer the above sceptical queries, one needs to do a deep analysis of importance of crude for economy. The following points will explain the same:

  • Oil generates revenue for states and centre

India is the third largest consumer of Oil in the world. The taxes on Petrol and Diesel constitutes substantial portion to the development of economy. The break up of taxes on petrol and diesel are as under:

It is interesting to note that Excise duty on Petrol and Diesel was below Rs 15 per litre even in the times of Global financial crisis of 2008. However,  the same  has ballooned to Rs 31 in 2020 after the recent increase.

The contribution of Crude to Central government and State government exchequer is as under:

Detailed Contribution of Crude to Central and State Government Exchequer

* as provided by MOP&NG. (P)- Provisional

– Based on data provided by 16 oil & gas companies.

The contribution of petroleum and petroleum products carries huge weight on the budgets of both central Government and State Government. Various levies like Cess, Royalty, Custom Duty NNCD, Excise Duty, GST etc forms major part of Government revenue. The slowdown in the economy is also visible in figures of revenues from taxes on petrol and diesel for FY 2019-20.           

  • Oil as a part of Export Revenue

The petroleum products exported from India are mainly petrol, diesel, naphtha, fuel oil, lubricants etc. The contribution of petroleum products export is substantial in Indian economy. The following is the 10 years data of Petroleum products export:

Source: As per Press Information Bureau Government of India Ministry of Petroleum & Natural Gas

Last 10 years export data suggest that the contribution of petroleum products are vital for building  Foreign reserves in the country. As per Department of Commerce (Export Import Bank), India’s total export is Rs 23,07,726 crore out of which export of petroleum products constitutes more than 10% of export value. The role of export of petroleum products is inevitable for Indian economy.

  • OMCs as strategic Disinvestment opportunity

Oil Marketing companies such as Hindustan Petroleum Corporation Limited (HPCL), Indian Oil Corporation Limited (IOCL) or Bharat Petroleum Corporation Limited (BPCL) gives an excellent strategic Disinvestment opportunity for Government and the value of such stakes can help Government to contribute substantially to its disinvestment targets especially after the pandemic has forced the government to raise revenues and disinvestment targets not been met in previous years leading to increased fiscal deficit. The performance (profits in Rs. crores) of these OMCs for past five years are as under:

Source: As per Press Information Bureau Government of India

Ministry of Petroleum & Natural Gas

The performance of these companies suggests the nature of business. These companies are cash rich companies and contributes substantially to the central government either in the form of lucrative dividend yields or through Direct Tax collection. Such splendid performance also enhances the stake value which Government holds in these companies and based on it the disinvestment of stakes can be done at enhanced value.

E.g.: BPCL disinvestment plan which can fetch more than Rs 70,000 crore of entire stake held by Government.

  • Increase in Refining Capacity

India is the third largest consumer of Oil with fuel demand of roughly 213.70 million tonners (FY 2019-20). However, the current refining capacity is 249.90 million tonnes. Infact recent studies have pointed out that even with an aggressive Electronic Vehicle rollout plan, India would need 450 million tonne of refining capacity (by 2040).

Further, in order to conquer the objectives of Atmanirbhar Bharat, India needs to expand its refining capacity which Ministry of Oil has intended to do so. The same has been visible on grounds that various refineries such as MRPL, IOCL etc have plans to expand the refining capacity. In fact, MRPL plans to spend more than Rs 31,000 crore in expansion of refining capacity.

The capacity expansion will foster the demand of certain Industries like Steel, cement etc and will further help in boosting employment opportunities. This indeed will contribute substantially to the GDP portion of the country. The expansion of refining capacity is a boost to Capex cycle which our country is missing since last 11 years. The capex cycle is an ongoing process. The ongoing process helps in Economic Value Addition to the country.

Enhancing CAPEX cycle in refinery should be done based on Greenfield plan and Brownfield plan.

  • Subsidy Bills for Electric Vehicles is Expensive

Initially in 2014, the government of India came with the initiative of subsidy on electric vehicle. The main aim emphasised on green environment and shifting of dependency on crude import. Government announced subsidy of Rs 1,50,000 on electric cars and Rs 30,000 subsidy on two wheelers. Government allocated roughly around Rs 10,000 crore annually for this initiative. However, initiative of electric vehicle failed badly in first phase. With lack of availability of infrastructure facility and costly vehicles due to higher cost of lithium ion battery, people lacked interest in buying electric vehicles.

Now correlating this electric vehicle concept with AatmaNirbhar Bharat dream, all battery components are imported from different countries (Majority is from China with which we have border issue). The production in India is negligible in terms of battery which forms 40-50% of the cost of the electric vehicle. Now with burgeoning fiscal deficit position and increased Government borrowings of more than 4 lakh crore to cover the fiscal deficit, Government will be least interested in supporting this subsidy scheme and will not waste money in promoting the scheme for phase 2 of Faster adoption and manufacturing of Electric Vehicles (FAME) in an aggressive manner. Further states are also not in position to support such increasing cost at a time when they are been forced to borrow from the market. Shrinking revenue of Government is the real cause if Government shift towards unconventional energy like crude. Already the first quarter advance tax collection is down by 75% indicating that the budgeted figures will not be met in the current year and fiscal deficit is expected to reach 7% for centre and 11% including state budget deficit.

The other issue is that of state revenues. While states supported electric buses from the point of view of saving operational cost in running state transport corporation, there is now a strong focus on increasing revenues in the aftermath of the pandemic. It was seen that various state government even allowed alcohol sales to commence right in the middle of the pandemic to fill state coffers as it was facing difficulties in paying salaries of the staff. Further, Central government can’t increase GST on goods and services as it is seen in negative light by the industry and consumers at such a difficult time. Very few items are out of GST ambit. Alcohol and Petroleum products provide major source of revenue to these entities. Therefore, it is the most plausible way of generating revenue.

The Second Order Effects

In economics, the second order effects also need to be studied to understand the impact of the decision. The country is currently facing a high inflation due to supply chain problems. Food inflation has been above 5% for past two quarters. The increase in the excise duty will affect the prices of these commodities as transport costs rises. Increased inflation will impact consumption. It will also impact the industry as it has been able to maintain profitability on back of input costs decreasing and taxation gains. However, if demand is affected due to the pandemic and input costs rise it will be a double blow and stagflation may take hold. It will also make products costly and affect exports performance. The Auto industry which is already facing a slowdown due to high ownership costs will face further increase in operational costs thereby affecting demand. Auto industry makes 50% of the manufacturing GDP and contributes highly to the GST base. If inflation remains high, central banks may be forced to keep interest rates stable or increase if need be to keep the bond yields from rising.  

There are other long term factors to consider. One is the fall in USA crude production. For past few years USA has been oil exporter due to tight oil exports. USA also imports crude to the extent of 7 million barrels per day but on balance it has been a net exporter. Due to the pandemic and the slowing economy coupled with fall in crude prices and lack of profitability of the industry, there has been a slowdown in investment in the production of tight oil. This is seen in the number of rigs deployed. There has been a fall in the numbers in recent times from 900+ in July 2019 to 199 in June 2020. Further the decline rates of tight oil are very high typically 50-60% in few years indicating that in a year or two there will be a decline in production. If USA has to import more oil, it will impact the oil price too and any increase in the price of oil will be negative for the growth of the economy. Therefore, it is necessary that we continue to build focus on renewables to keep the economy insulated from oil shock.


Since from above points it has been substantiated that crude itself has all potential to contribute towards economy in a big manner either through exports or refinery expansion or disinvestment and through collection of taxes. However, the burden on taxpayers has been increased especially at a time when they are under the impact of covid-19 pandemic. Increased costs of goods will affect demand and can slow the economy while on the other hand government has no other source to raise revenue to meet its deficits. The government is facing a precarious position and needs a bit of luck and careful handling of the situation.

Being an emerging market, we are prone to the risk of volatility in currency against dollar. Crude imports constitute major portion of the outflow of currency. Any volatility in currency can ruin the whole picture of economy and can lead to burgeoning fiscal deficit which the government is not in the position to face off.

  • By Vishal Vora, Nishant Maheshwari

Disclaimer: The above article is based on views expressed by the authors and are meant for information purpose only. Readers are requested to take investment decisions by consulting financial advisors.


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