India's Oil Habit Is About to Become a Serious Drag for Modi
(Bloomberg Gadfly) -- One under-appreciated factor behind Narendra Modi's success as Indian prime minister has been the tailwind he's received from low oil prices.
Brent crude averaged $99.43 a barrel during his predecessor Manmohan Singh's second term in office, putting pressure on an economy that's heavily dependent on imports. It began its precipitous decline from those levels just weeks after Modi took office in 2014, slumping 42 percent during his first year in the job and helping to almost erase a current account deficit that subtracted as much as 5 percentage points from GDP in 2013.
With fresh elections due in a year, Modi's luck is on the turn. Brent crude is up more than a quarter over the past 12 months, pushing domestic prices for diesel and gasoline to multi-year highs. India's triumvirate of state-run oil retailers are being pressured to sell transport fuel at a loss to limit the pressure at the pump, people familiar with the matter told Siddharta Singh of Bloomberg News.
The gripe from many consumers is that the government and the oil retailers pocketed all the benefit from falling prices.
That complaint isn't without foundation: Government petroleum revenues more than doubled over the four fiscal years through March 2017, driven by a near-threefold increase in the excise duties paid direct to the central government.
Of the 74 rupees ($1.13) that a liter of gasoline costs currently in New Delhi, 35 rupees goes on taxes, as well as 25 rupees of the 65 rupee-a-liter cost of diesel.
The big three state-controlled oil marketing companies now being leaned on to sell at a loss have also done well. Aided by the government's deregulation of prices, net income at Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. more than tripled over the three fiscal years through March 2017 and is set to repeat the trick in the most recent 12 months.
That suggests a simple solution that would be congenial at the ballot box, too: Force the marketing companies to sell at a loss, merge excise and state sales duties in a slimmer goods and services tax, and bask in the approval of the voters.
It's a siren call that Modi should resist, however.
As Gadfly has warned in the past, India faces a looming oil drought if it doesn't shift to a less crude-dependent path. The sort of dramatic switch to electric cars that's been mooted by energy minister Piyush Goyal and is now being encouraged by the tax code isn't needed just to reduce urban pollution and slow carbon emissions. It's also a necessity for the current account of a country whose import dependence risks turning oil into a drag on its economy for decades to come.
Even now the state's involvement in the market means that India is subsidizing its oil sector, according to International Energy Agency figures. The $10.2 billion difference between market and retail prices is the biggest slug of state support globally after Saudi Arabia, Iran, Venezuela and China, according to the agency.
That's a sum that would be far better added to the tax total and used to spur investment in the headlong expansion of metro systems currently underway in Delhi, Mumbai, Chennai, Kolkata and Bengaluru -- by far the best way of connecting up India's crowded cities without drowning them in congestion and pollution.
The dealers doing well off India's oil habit would like to tempt it in the other direction. Saudi Aramco signed a memorandum of understanding Wednesday to participate in a $44 billion refinery being planned by the three oil marketing companies on the country's west coast. But the $80 a barrel that Riyadh hopes for to support its own budget and flatter the upcoming Aramco IPO is a long way from the $50 a barrel that oil minister Dharmendra Pradhan wants.
Courage is a risky quality in the run-up to an election, but there's no time like the present to go cold turkey. If India doesn't get control of its oil addiction, oil addiction will end up controlling India.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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