Rising Oil Imports

IIPM MANAGEMENT INSTITUTE

Factor number two that makes India vulnerable is the future of the rupee vis-à-vis the American dollar. Historically, the Indian rupee has always fallen in value against the dollar, increasing the burden of oil imports. Take 1991, when the combination of Manmohan Singh as finance minister and P. Chidambaram as commerce minister launched economic reforms by devaluing the rupee against the dollar by almost 50% in a phased manner. The immediate result: a 50% jump in the rupee burden of oil imports. If there is sustained pressure on the rupee, India will be vulnerable to higher import bills. Yet, the performance of the rupee against the dollar over the last few years has been remarkably stable. And if FII and FDI inflows continue to accelerate, there will be no significant pressure on the rupee. Nevertheless, going by the historical behaviour of the rupee against the dollar, future areas of concern remain.

The third factor that makes India vulnerable is the growing oil intensity in the economy. In layman’s terms, oil intensity refers to the amount of oil used to produce one unit of GDP. Traditionally, the oil intensity in a developing economy keeps going up. India is no different, though there was a decline in the 1990s. The sustained growth in India’s transportation and automotive sectors means that oil intensity will remain high, leading to higher oil consumption and inflated import bills.

So much for the factors that could make the Indian economy vulnerable in the long run. The key concern relates to what Indian policy makers can do to ensure two things: One, that India pays as less as possible for oil imports in the long run. And, two, that political and other upheavals do not disrupt oil supplies resulting in yet another dose of oil shock to the Indian economy.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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