Choosing sides

India’s business community and the International Monetary Fund (IMF) are warning that the country’s economy is rapidly decelerating, with stubbornly high energy costs and the uncertain state of supply a growing threat to the government’s plan to double the nation’s per capita income by 2017.

In its report on the country published in April, the IMF said that India’s high flying economy could suffer a “sizeable impact” from the Eurozone-led global crisis combined with its own volatile inflation, slow government decision making and poor investment outlook. India’s economy grew by 8 - 9% in the previous two years.

Of great concern too is that inflation is projected to stay at around 7% for most of 2012, well above the Indian Central Bank’s target of 4.5% in the near-term and 3% in the medium-term. The country’s current account deficit is expected to widen to 2.8% of GDP on account of lower export earnings and higher import spending brought on by high oil prices, while external risks could significantly prolong the downturn.

Oil raised trade deficit to record high of US$ 185 billion

Led by its rising oil bill, India’s trade deficit surged more than 77% to reach a record US$ 185 billion for the financial year ending 31^st March, 2012.

Oil accounted for US$ 150 billion of India’s US$ 485 billion import expenses last year as its economy took it on the chin with crude oil trading at an average US$ 100/bbl while the country’s oil consumption grew 4.3%. India’s import of 2.4 million bpd covers nearly 80% of its crude oil requirements.

Commerce and Industry Minister Anand Sharma blamed high oil prices for putting the deficit “beyond control”. While exports grew more than 20% to exceed US$ 300 billion for the first time, it was eclipsed by the 38.2% rise in imports to US$ 485 billion.

While downplaying the risk of a repeat of the 1991 balance of payment crisis, Central Bank Chief Duvvuri Subbarao voiced his concerns about the country’s rising deficits and short-term debt levels. Back in 1991, India nearly defaulted on foreign debt payments when its fragile economy caved in under the pressure of rising oil prices shortly after Saddam Hussein’s Iraq invaded Kuwait.

Subbarao’s fears are well unfounded as India’s oil, gas and coal import spending has shown no signs of letting up.

According to the London-based Centre for Global Energy Studies (CGES), India’s oil imports will continue to rise as a result of rising demand and declining domestic production.

“In the next five years, we expect Indian oil consumption to rise by almost 700 000 bpd, leading to oil imports of 3.5 million bpd by 2015,” it said.

Turkmenistan lined up as new gas supplier

As a medium-term solution, the Indian government has appointed state gas firm GAIL India Ltd to begin importing 38 million m³/d of natural gas from Turkmenistan for 30 years.

Given the volatile nature of Central Asian politics, the plan is fraught with uncertainties as it is dependent on the 2018 completion of the proposed 1680 km Turkmenistan-Afghanistan-Pakistan-India line (TAPI) that has the capacity to carry 90 million m³/d of gas.

Pakistan has signed on for 38 million m³/d while Afghanistan will purchase the remaining 14 million m³/d in a deal brokered by the US government aimed at weaning the three energy deficit countries from dependence on Iran and rival pipeline projects championed by China and Russia. China is backing a proposal to pipe natural gas from Iran’s giant South Pars field to India, Pakistan and Afghanistan.

The deal was formalised recently when officials from the four Asian countries met in Turkmenistan in late May to conclude details of the US$ 7.6 billion TAPI pipeline.

According to BP, the Central Asian state, which wants to diversify its gas sales from Russia, has around 8.3 trillion m³ of natural gas reserves or 4.3% of the world’s total.

The Iran conundrum

Further complicating India’s energy situation is the question of what it should do with Iran, a long-time trading partner on friendly terms that the West desperately wants to isolate on the world stage.

Similar to China, India does not share Western concerns that Iran is a military threat or that it plans to weaponise its nuclear energy programme. At the same time, India, a rising power that also enjoys good relations with the West, is increasingly dependent on Iran’s oil to fuel its economy.

The US government has warned that it might impose sanctions on India in late June if it does not join in the trade sanctions against the Islamic regime.

According to Switzerland-based consultants, Petrologistics, India recently became the biggest buyer of Iranian crude with imports surging to a recent record high of 433 000 bpd from 325 000 bpd last year.

In early May, US State Secretary Hilary Clinton flew to New Delhi to try stop the cosy relations between India and Iran. Despite objections from the Oil Minister, the Indian government has agreed to target a 11% reduction in Iranian oil intake while seeking US assistance to source supplies from other producers including Saudi Arabia, the UAE and Iraq.

Shortly after Clinton’s visit, the UAE agreed to consider India’s request to raise crude supply from 280 000 bpd last year and 240 000 bpd in 2010. Following their meeting in New Delhi, Foreign Minister Sheikh Abdullah and External Affairs Minister S.M. Krishna said they would also look to expand energy ties, including jointly investing in oil refineries and petrochemical production.

At the same time, a senior US official said India is working on increasing oil imports from Saudi Arabia and Iraq.

Briefing a congressional hearing, Assistant Secretary of State for South and Central Asia Robert Blake said Indian companies are also reducing their trading activities with Iran due to the impact of tightening sanctions. Last year, the Saudi government had mentioned it was planning to double its crude oil export to India to over 800 000 bpd in 2012.

Energy ties with Iran to continue

Notwithstanding the relentless US pressure, the Indian government is set on continuing its existing annual US$ 15 billion trade ties with Iran.

As if to underline this point, India extended an official reception to a 56 member Iranian trade delegation to New Delhi to coincide with Clinton’s three day visit.

Briefing reporters, Krishna said he told Clinton that India wants to see peace and stability in the Middle East and West Asian region, which provides employment to six million Indians, is a vital source of oil and gas, and a potential market for US$ 100 billion worth of Indian exports.

While pressing Iran to follow international protocol, Krishna added that India, itself a nuclear power, also respects the Middle Eastern nation’s rights to pursue nuclear activities for peaceful purposes.

He downplayed US threats to impose sanctions on India for refusing to cut off trade ties with Iran by stating that his country’s stance was “not a source of discord” with the West.

Meanwhile, India has been reducing oil imports from Iran over the past year. For the last financial year to 31^st March, 2012, India imported 17.4 million t of Iranian oil, and may slash that to 15 million t in the current year.

But there is a limit on how much it can or wants to reduce trade with Iran. India needs a stable supply of oil and gas to ensure that high energy prices do not spark domestic inflation. With the US and Europe mired in recession and its own economy floundering, it also needs to boost trade with other developing countries.

With the visit of the Iranian trade delegation, the Federation of Indian Export Organisations (FIEO), an agency under the Trade Ministry, is hoping to boost exports to the sanctions-hit Middle East economy from the current level of less than US$ 3 billion/yr.

This is an abridged version of the full article from Ng Weng Hoong, which was published in the July 2012 issue of World Pipelines, available for subscribers to download now.

Read the article online at: https://www.worldpipelines.com/business-news/31072012/investigating_india%E2%80%99s_energy_prospects_and_future_plans/