End the dependence

As oil price volatility affects economy, the govt must work to ease its way out of the US grip on oil market

How crucial international crude oil prices are for the performance of the Indian economy is well established. But, every few months global markets register a reminder of this. Just four weeks back, when crude oil prices were soaring and had gone above the $85 mark, the financial markets very extremely nervous. Sensex was slipping southward, bonds yields were soaring and the rupee went into a weight loss programme. The spike in prices had forced the government to deviate from the principle of not intervening in retail crude oil pricing by oil marketing and refining companies – these companies were asked to share the burden of overall cut of Rs 2.5 per litre. That was early last month. Today, as crude oil prices are cooling down, they slipped below the $73 mark on Monday. As a result, Indian financial markets are once again standing on their feet. Bond yields have come below 8 per cent with the rupee gaining a good amount from recent lows and stock indices making a sort of comeback.

While financial markets are quick to price in any impact of macro development whether favourable or unfavourable, pricing does not take place as quickly, especially when it comes to inflation. Prices at the retail level, which go up once, either due to decline in rupee or increase in oil prices, do not come down easily.

The most prescient of global experts would baulk at the idea of saying with certainty that volatility in oil prices is over and would not cross $80 dollar a barrel mark again. Probably, a slight tension between Iranian and US ships in the Strait of Hormuz is enough send prices soaring once more. If that were to happen, Indian financial markets would record the event for sure.

It is high time that policy makers found a way to ensure that the Indian economy was less prone to oil shocks. Till that happens, GDP growth rates will have a higher element of volatility. This element of volatility may appear normal to some. However in India, because it happens due to one single commodity that is crude oil – which, in turn, is impacted by various unpredictable geopolitical developments – it makes India’s position more vulnerable.

So policy makers should look at the sectors, which are consuming oil and start to work on ways to reduce their dependence on oil. One good thing is that, at least for the automobile sector, alternatives have reached a stage where they are commercially viable. In certain parts of the world, the number of electric charging stations has outnumbered petrol stations. So, there are solutions available. What is required is an urgency to be felt by policy makers to bring those solutions to India. Electric cars and buses are not prototype solutions – they are real solutions running on road. India needs to have a policy where it gives a massive push to battery-powered mobility solutions. The government can have a corpus to fund research in making these solutions more viable for Indian roads. It might lose money over the short term because solutions might not be quickly found. However, this must be considered against the backdrop of the fact that when oil prices rise, the economy takes a hit anyway and that would be much above what is set aside on research for alternative fuel. The long-term gain would also involve being less dependent on what the US dictates to the world in terms of which country one can buy oil from. India needs a policy from perspective of changing fundamental structure of economy as far as dependence on oil is concerned.