Post by bhumika on Jun 10, 2006 12:07:07 GMT 5.5
THE OIL imbroglio is casting its shadow on the economies of oil importing countries, particularly the developing economies. With world crude prices ruling around $70 a barrel and increased consumption in oil deficient economies, the cost of imports is proving to be prohibitive.
Current discussions veer around minimising the impact of high oil prices on the external sector of the economies concerned and the resultant inflationary pressures.
It is difficult to visualise a reversal of the uptrend in prices that will enable oil importing countries avoid a slowdown in their growth rates.
While world oil reserves are not expected to last more than 25 years, the current speculative activity in world markets is due largely to fears over likely U.S. action against Iran over the issue of enrichment of uranium by the latter.
Iraq too has not been able to raise exports from its huge oil reserves because of the troubled internal situation.
Impact on India
The Indian economy could meet a rising oil import bill till 2003-04 as the trade deficit even on the basis of Reserve Bank data could be bridged with net invisible receipts and a surplus of $14.08 billion reported.
Even that year, the oil import bill was quite high at $20.57 billion against $17.64 billion and $14 billion in the two previous years.
As non-oil imports grew by 31.54 per cent, the trade deficit on the basis of Directorate General of Commercial Intelligence and Statistics data was $ 14.31 billion against $ 8.69 billion, despite a 21 per cent growth in exports.
With a lower trade deficit of $13.72 billion on the basis of RBI data, the surplus on current account was higher at $ 14.08 billion against $ 6.35 billion in 2002-03.
Net invisible receipts had risen sharply to $ 27.80 billion from $ 17.04 billion.
After 2003-04 the situation in the external sector worsened as oil imports zoomed to $ 29.86 billion and the trade deficit to $ 25.96 billion, despite an export growth of 26.36 per cent in 2004-05.
With a widening of the gap between DGCIS and RBI deficits at $ 25.96 billion and $36.63 billion respectively, a deficit of $ 5.40 billion emerged on current account though the required funds for bridging the deficit could be easily found.
Zooming oil bill
In the past year, there was a further deterioration in the external sector as the oil bill rose to $ 43.84 billion and the trade deficit to $ 39.63 billion.
The deficit on current account may be much higher at $ 16 billion.
In the nine months ended December 31, 2005, the trade gap on the basis of RBI data was higher at $ 41.53 billion and the current account deficit $13.48 billion with net invisible receipts at $ 28.06 billion.
It is not surprising that with soaring current account deficits and a heavy burden of subsidies borne by the Central Exchequer and the public sector oil companies, the rupee has been depreciating against the dollar, in spite of the latter itself weakening against other major currencies.
Crippling subsidies
Oil subsidies amounted to over Rs. 50,000 crore in 2005-06, even after adjustments in import and excise duties and other measures.
The Finance Ministry was not willing to reduce import and excise duties further though the oil companies were provided some relief with the issue of zero interest oil bonds for Rs. 11,500 crore.
The subsidy burden for the current year is placed much higher at Rs. 73,000 crore and oil bonds may have to be issued for at least Rs. 20,000 crore. Even so, the net incidence of subsidies will be higher this year. A slight reduction under this head is likely with a modest increase in selling prices for gasoline and diesel. But the unchanged selling prices for cooking gas and kerosene sold through fair price shops will get reflected in a bigger rise in subsidies in the absence of a sharp fall in crude prices.
Need for alternatives
Against this background it is imperative to examine ways of avoiding further rise in imports of crude, petro products and natural gas through increased output of crude and natural gas from indigenous sources and use of alternative fuels such as ethanol. Developments in 2007-08 on this front may be encouraging as sizable quantities of natural gas may be available from the Krishna-Godavari offshore regions.
Also, it may be possible to increase the output of crude from offshore and onshore areas with greater success attending the exploration efforts in Rajasthan and offshore areas of Gujarat and Krishna-Godavari basins.
In the meantime, vigorous efforts have to be made to minimise the use of petro products with admixture of ethanol in gasoline up to 15 per cent initially and 25 per cent eventually. Increased power generation from conventional and renewable energy sources will have to be attempted on a defined basis. The funds required for the mega projects in the infrastructure sectors can, of course, be secured only with larger foreign direct investment and continued FII inflows.
Slump in bourses
The happenings in the bourses latterly, however, have been disheartening, as FIIs have been effecting sales following apprehensions that reform measures may not be implemented vigorously on account of the pressure from Left parties after their recent success in the Assembly elections.
Rising interest rates in developed countries too have had a complicating effect. The BSE index plummeted by 2844.20 points from the peak levels and the index closed at 10071.42 on June 1. There was a modest recovery to 10451.33 on June 2.
The fundamentals of the economy, however, are sound and there may not be any slowdown in growth. GDP growth was exemplary at 8.4 per cent in 2005-06 against 7.5 per cent comparably, as a result of a sharp rebound in agriculture and continued satisfactory performance of the manufacturing and services sectors.
With the early advent of the monsoon this year and the expectation of higher domestic demand for various products, the growth in GDP may be maintained around 8 per cent in the current financial year as well. But the UPA Government has to take definite decisions about reform measures that will attract FDI inflow of $10 billion and more annually.
The bourses will have to be reasonably buoyant for maintaining the tempo of activity in the primary market. The happenings in the coming months have crucial significance, as fiscal and monetary policies of the Government and the Reserve Bank have to be suitably dovetailed.
P. A. SESHAN
Current discussions veer around minimising the impact of high oil prices on the external sector of the economies concerned and the resultant inflationary pressures.
It is difficult to visualise a reversal of the uptrend in prices that will enable oil importing countries avoid a slowdown in their growth rates.
While world oil reserves are not expected to last more than 25 years, the current speculative activity in world markets is due largely to fears over likely U.S. action against Iran over the issue of enrichment of uranium by the latter.
Iraq too has not been able to raise exports from its huge oil reserves because of the troubled internal situation.
Impact on India
The Indian economy could meet a rising oil import bill till 2003-04 as the trade deficit even on the basis of Reserve Bank data could be bridged with net invisible receipts and a surplus of $14.08 billion reported.
Even that year, the oil import bill was quite high at $20.57 billion against $17.64 billion and $14 billion in the two previous years.
As non-oil imports grew by 31.54 per cent, the trade deficit on the basis of Directorate General of Commercial Intelligence and Statistics data was $ 14.31 billion against $ 8.69 billion, despite a 21 per cent growth in exports.
With a lower trade deficit of $13.72 billion on the basis of RBI data, the surplus on current account was higher at $ 14.08 billion against $ 6.35 billion in 2002-03.
Net invisible receipts had risen sharply to $ 27.80 billion from $ 17.04 billion.
After 2003-04 the situation in the external sector worsened as oil imports zoomed to $ 29.86 billion and the trade deficit to $ 25.96 billion, despite an export growth of 26.36 per cent in 2004-05.
With a widening of the gap between DGCIS and RBI deficits at $ 25.96 billion and $36.63 billion respectively, a deficit of $ 5.40 billion emerged on current account though the required funds for bridging the deficit could be easily found.
Zooming oil bill
In the past year, there was a further deterioration in the external sector as the oil bill rose to $ 43.84 billion and the trade deficit to $ 39.63 billion.
The deficit on current account may be much higher at $ 16 billion.
In the nine months ended December 31, 2005, the trade gap on the basis of RBI data was higher at $ 41.53 billion and the current account deficit $13.48 billion with net invisible receipts at $ 28.06 billion.
It is not surprising that with soaring current account deficits and a heavy burden of subsidies borne by the Central Exchequer and the public sector oil companies, the rupee has been depreciating against the dollar, in spite of the latter itself weakening against other major currencies.
Crippling subsidies
Oil subsidies amounted to over Rs. 50,000 crore in 2005-06, even after adjustments in import and excise duties and other measures.
The Finance Ministry was not willing to reduce import and excise duties further though the oil companies were provided some relief with the issue of zero interest oil bonds for Rs. 11,500 crore.
The subsidy burden for the current year is placed much higher at Rs. 73,000 crore and oil bonds may have to be issued for at least Rs. 20,000 crore. Even so, the net incidence of subsidies will be higher this year. A slight reduction under this head is likely with a modest increase in selling prices for gasoline and diesel. But the unchanged selling prices for cooking gas and kerosene sold through fair price shops will get reflected in a bigger rise in subsidies in the absence of a sharp fall in crude prices.
Need for alternatives
Against this background it is imperative to examine ways of avoiding further rise in imports of crude, petro products and natural gas through increased output of crude and natural gas from indigenous sources and use of alternative fuels such as ethanol. Developments in 2007-08 on this front may be encouraging as sizable quantities of natural gas may be available from the Krishna-Godavari offshore regions.
Also, it may be possible to increase the output of crude from offshore and onshore areas with greater success attending the exploration efforts in Rajasthan and offshore areas of Gujarat and Krishna-Godavari basins.
In the meantime, vigorous efforts have to be made to minimise the use of petro products with admixture of ethanol in gasoline up to 15 per cent initially and 25 per cent eventually. Increased power generation from conventional and renewable energy sources will have to be attempted on a defined basis. The funds required for the mega projects in the infrastructure sectors can, of course, be secured only with larger foreign direct investment and continued FII inflows.
Slump in bourses
The happenings in the bourses latterly, however, have been disheartening, as FIIs have been effecting sales following apprehensions that reform measures may not be implemented vigorously on account of the pressure from Left parties after their recent success in the Assembly elections.
Rising interest rates in developed countries too have had a complicating effect. The BSE index plummeted by 2844.20 points from the peak levels and the index closed at 10071.42 on June 1. There was a modest recovery to 10451.33 on June 2.
The fundamentals of the economy, however, are sound and there may not be any slowdown in growth. GDP growth was exemplary at 8.4 per cent in 2005-06 against 7.5 per cent comparably, as a result of a sharp rebound in agriculture and continued satisfactory performance of the manufacturing and services sectors.
With the early advent of the monsoon this year and the expectation of higher domestic demand for various products, the growth in GDP may be maintained around 8 per cent in the current financial year as well. But the UPA Government has to take definite decisions about reform measures that will attract FDI inflow of $10 billion and more annually.
The bourses will have to be reasonably buoyant for maintaining the tempo of activity in the primary market. The happenings in the coming months have crucial significance, as fiscal and monetary policies of the Government and the Reserve Bank have to be suitably dovetailed.
P. A. SESHAN