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Middle East Tensions And Impact On India’ Growth Story

Industry experts and economists largely agree that India can do nothing much under the current circumstances given our dependence on the imported oil and gas.

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World seem to be relieved with the de-escalation of the tensions between the US and Iran atleast for now following the recent attacks on US personnel and assets in Iraq and counter attack by US killing a top Iranian General and a few others.  While the risk of a full-scale war between the US and Iran may be low, experts warn that the current regional tensions are likely to remain atleast for the foreseeable future given the complex geopolitical developments in the region.  Any such instability in the supply chain could lead to a highly volatile global crude market with Brent Crude crossing 70$ and perhaps hover close to 80$. 

Industry experts and reputed economists such as Nuriel Roubini (who predicted the 2008 global recession) argue that in case of a full-scale war in the region, oil prices could hit through roof atleast short term to above $100 per barrel. It is likely we will witness a global recession in that extreme scenario. 

But for India, the third largest crude oil importer after China and Japan the impact could be much more adverse given that two thirds of its crude oil imports come from the Middle East. India imports about 4.5 million barrels of crude oil per day which is 83% of its demand. For every 10 $ increase in crude price beyond the current base assumption of 70$, the GDP could be impacted by about 1%. In other words, crude pricing of 80 $ would mean 1% drop in GDP and at 100$ level the GDP could be pulled down by 3%.

Such a situation will pose a grave threat to India’s growth story and some of the key sectors that would take the direct hit from this crude price escalation are manufacturing industry, agriculture, aviation and infrastructure projects. For an economy already struggling with raising unemployment and an alarming increase in NPAs this crisis could only end up adding ‘fuel to the fire’!

Together Oil and gas accounts for over a third of our primary energy we consume every year. This excessive dependence on the vital primary energy source will remain as a key challenge for India’s growth story. 

What can India do to mitigate the impact of the escalating tensions in the Middle East? 

Industry experts and economists largely agree that India can do nothing much under the current circumstances given our dependence on the imported oil and gas.

* India with its historic relations with the key players in the conflict and having a huge interest in the region not only as a top importer of crude oil but having over six million Indians present and serving in the region can be a key influencer in deescalating the tensions. 

Simply put, India can not afford a full scale war in the region that could threaten its fuel supplies and lives of millions of its citizens. Time for India to raise to the occasion!

* Another key challenge that India need to address is the diversification of its crude supply sources as nearly two thirds of the crude supply for India comes from the Middle East. It is easier said than done given the pricing, transportation costs and risks involved. However, the Government of India seems to have already been working in this space and more focus and attention is warranted on the issue.

* India’s domestic crude production remained stagnant and has been declining for the last six years as most of the discovered fields are now in mature phase and the yield is declining. India set an ambitious goal of 10% reduction in oil imports by 2022 and opened new areas for exploration and allotted proven blocks under DSF and OLAP schemes. However, success of these initiatives depends on regulatory approvals and continual monitoring by the government and the goal seems quite an uphill task. 

Industry experts argue that any significant increase in domestic oil and gas production can only be achieved with the active engagement of global oil majors who have both technology to harness resources in deep water or  unconventional shale formations and financial resources to undertake such massive upstream projects.  This calls for a thorough review of India’s long term energy policy and a risk based policy to move forward with a firm determination and commitment to protect the national interest and that of the investors.      

* Currently India maintains emergency strategic crude reserves (about 37 million barres) adequate to provide for 10 days of consumption in case of any external supply disruption. Government is also planning to augment the capacity by treble so that the country can manage any supply disruption atleast for a month. But these expansion or new projects are mired in delays and are not expected to come on stream soon. There is a need to fast track these projects and further expand the capacity to meet growing energy demand. 

* India needs to diversify its primary energy mix away from fossil fuels and expand the share of renewable energy. The government recognized this imperative and set an ambitious goal of raising installed capacity of renewables to 175 GW by 2022. While the progress so far has been encouraging, the actual capacity realization requires a capital investment of atleast 100 billion $ over the next three years. Government and NitiAyog need to sharpen the plans to attract local and foreign investors and provide a supportive ecosystem for sustaining the overall growth. Key challenges the government may have to address soon on priority are related to land acquisition, roof top solar incentives, expanding avenues for solar energy applications, creating green energy corridors and alignment between state and central government on renewable power projects.   

With these safeguards in place to whatever extent reasonably practicable, India will be in a better place to continue its growth story and achieve 5 Trillion $ economy within the next few years.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Hari K Polavarapu

The author is an oil and gas industry veteran with over 36 years of experience in various facets of operational, governance and management roles across the hydrocarbon supply chain. He is currently a senior executive with a NOC in the Middle East.

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