i

11/3/2019 Impact of Crude

oil and on oil
revenue on the
Economy of
India

DEVANSH JAIN
THE NORTHCAP UNIVERSITY
 ii

IMPACT OF CRUDE OIL

AND
ON OIL REVENUE
ON THE ECONOMY
OF INDIA

DEVANSH JAIN

THE NORTHCAP UNIVERSITY

MARCH 11,2019
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Copyright notice

@2019 The Northcap University

All rights reserved. No parts of this report may be

reproduced in any form or any means without
permission in writing from the publisher.
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ACKNOWLEDGEMENTS

First, I would like to thank our faculty co-ordinator Dr. Kriti Khurana, for
her support. She is responsible for involving us in the report. She taught
us how to express our ideas. She showed me different ways to approach a
research problem and the need to be persistent to accomplish any goal. She
was always there to meet and talk about my ideas & listening to my doubts
and for believing in me.

Thanks to The NorthCap University for providing us a chance to complete

this report. A special thanks goes to my friends who are most responsible for
helping me complete the writing of this report as well as the challenges that
lies behind it, with whom I explored the ideas, requirements and development
of this report.

Last, but not least, I thank my parents, for giving me life in the first place,
for educating me with aspects from both arts and sciences, for unconditional
support and encouragement to pursue my interests, even when the interests
went beyond boundaries of language, field and geography and numerous
friends who endured this long process with me, always offering support and
love.
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Table of content

COPYRIGHT NOTICE iii

ACKNOWLEDGEMENTS iv
TABLE OF CONTENT v
LIST OF FIGURES AND TABLES vi
ABSTRACT vii

I. INTRODUCTION
1
II. CRUDE OIL
2
III. OIL RESERVES AND REFINING SECTOR IN INDIA 2
IV. INDIAN CRUDE OIL PRODUCTION BY REGION 4
V. IMPORT OF CRUDE OIL
4
a. INDIA PETROLEUM 5
b. PRODUCTION AND CONSUMPTION 5
VI. IMPACT OF CRUDE OIL ON INDIAN ECONOMY 6
a. ECONOMIC BACKGROUND OF INDIA 6
b. BACKGROUND OF PRICES 7
VII. IMPACT OF CRUDE OIL PRICES 8
VIII. ECONOMIC IMPACT OF CRUDE OIL PRICE RISE 10
a. IMPACT ON CURRENT AMOUNT DEFICIT 10
b. IMPACT ON FISCAL DEFICIT 10
c. IMPACT ON RUPEE 10
d. INFLATION 11
e. IMPACT ON ECONOMY 11
IX. ECONOMIC IMPACT OC CRUDE OIL PRICE DECLINE 11
a. CURRENT ACCOUNT DEFICIT 11
b. FISCAL DEFICIT 11
c. INFLATION 12
d. IMPACT ON RUPEE 12
X. CONCLUSION
13
XI. REFERENCES 14
XII. BIBLIOGRAPHY 15
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List of figures

I. INDIA CRUDE OIL PRODUCTION BY REGION 4

[Link] OF CRUDE OIL IN DIFFERENT COUNTRIES 5

III. IMPACT OF CRUDE OIL PRICES IN INDIA 9

LIST OF TABLES

I. INDIAN REFINERY SECTOR 3

[Link] OIL PRICES 4

III. PRDUCTION AND CONSUMPTION OF PETROLEUM

PRODUCTS 5

IV. OIL RATE OVER THE YEAR 8

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Abstract

The requirement of crude oil has been increasing at a rapid pace which has
made India dependent on crude oil imports. The basic price of crude oil is
always lesser the import taxes make it more costly for a common man. The
price of petrol or other related products increases accordingly which
results in increase in expenditure of a common man. This paper given an
insight into the present state of crude oil imports and an attempt has been
made to explain the importance of reducing the crude oil imports in order
to improve the living standards of a common man.
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Introduction

An economic system is a system of those institutions which a given nation or group of nations
has chosen or accepted as the means through which there resources are utilized for the
satisfaction of human requirements.
India has undergone a paradigm shift owing to its competitive stand in the world. The Indian
economy is on a robust growth trajectory and boasts of a stable annual growth rate, rising
foreign exchange reserves and booming capital markets among others. The Economy of India
is the seventh-largest in the world by nominal GDP and the third-largest by purchasing power
parity (PPP). The country is one of the G-20 major economies, a member of BRICS and a
developing economy among the top 20 global traders According to the world trade
organization. According to the Ministry of Finance Government of India the annual growth
rate of Indian economy is projected to have increased to 7.4% in fiscal year 2014-15 as
compared with 6.9% in the fiscal year 2013-14. In the annual report, IMF-forecast, the Indian
Economy would grow by 7.5% percent in the 2015-16 fiscal years starting on April 1, 2015,
up from 7.2% (2014–15). India was the 19th-largest merchandise and the 6th largest services
exporter in the world in 2013; it imported a total of $616.7 billion worth of merchandise and
services in 2013 as 12th-largest merchandise and 7th largest services importer. The
agricultural sector is the largest employer in India's economy but contributes a declining share
of its GDP (13.7% in 2012-13).
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Crude Oil
A mixture of hydrocarbon that exists in liquid phase is natural. Underground reservoirs and
remain liquid at atmospheric pressure after passing through surface separating facilities,
depending upon the characteristics of crude oil stream. It may also include:
a) Small amount of hydrocarbons that exists in gaseous phase in natural underground
reservoirs but are liquid at atmospheric pressure after being recovered from oil well gas in
lease separators and subsequently comingled with the crude oil stream without being
separately measure.
b) Small amount of non-hydrocarbons produce with oil, such as sulpher and various metals.
c) Drip gases and liquid hydrocarbons produce from tar sands, gallstone, and oil shale, liquid
produce at natural gas processing plants are excluded. Crude propane and butane and
many other products used for the energy of chemical content.

Oil Reserves and Refining Sector in India

The refinery section info is listed in table below. India has about 125 million metric tons of proven
oil reserves as April 2010 or 5.62 billion barrels as per United States Energy Information
Administration (US EIA) estimate for 2009. India has 47 trillion cubic feet of natural gas reserves in
2014.
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Refinery location Name of Company Crude oil capacity (1000

barrels/ day
Barnai, Bihar Indian oil corporation Ltd. 120
Bongaigon, Assam Indian oil corporation Ltd. 47
Digboi, Assam Indian oil corporation ltd 13
Guwahati , Assam Indian oil corporation ltd 20
Haldai , West Benagl Indian oil corporation ltd 151
Koyali, Gujrat Indian oil corporation ltd 275
Mathura , UP Indian oil corporation ltd 160
Panipat , Haryana Indian oil corporation ltd 301
Mahul , Mumbai Hindustan Petroleum corporation Ltd. 131
Vishakhapatnam ,AP Hindustan Petroleum corporation Ltd 166
Mahul , Mumbai Bharat petroleum [Link] 241
Kochi, Kerala Bharat petroleum [Link] 191
Manali, Chennai Chennai petroleum corp. Ltd 211
Nagapattinam , Tamil Chennai petroleum corp. Ltd 20
Nadu
Mangalore, Karnataka Mangalore refinery ltd. 302
Namaligarh, Assam Namaligarh refinery ltd. 60
Tatipaka , AP ONGC Ltd. 1
Joint Venture
Bina, MP Bharat-Oman refinery ltd. 120
Bathinda, Punjab HPCL-Mittal Energy Ltd.
180 180
Private Sector
Jamnagar, Reliance Industry Ltd. 660
SEZ, Jamnagar Reliance Industry ltd. 580
Vadinar, Gujarat Essar oil Ltd. 405
Total 4351

Indian Crude Oil Production by Region

According to Oil & Gas Journal (OGJ) India held nearly 5.7 billion barrels of proved oil reserves
at the beginning of 2014. About 44% of reserves are onshore resources, while 56% are offshore.
Most reserves are found in the western part of India (Fig. 1), particularly in the north eastern part
of the country. It is also an important oil producing region and contains more than 23% of the
country’s reserves and 12% of the production.
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Import of Crude Oil

%Growth Average %growth in
Year in import Crude oil Average
MMT of crude prices Crude oil

oil (US$/bbl.) prices

2009-10 159.259 19.95 69.760 -16.53
2010-11 163.595 2.72 85.090 21.98
2011-12 171.729 4.97 111.890 31.50
2012-13 184.795 7.61 107.970 -3.50
2013-14 189.238 2.40 105.520 -2.27

During the year 2013-14 the import of crude oil was 189.238 MMT valued at Rs. 8,64,875 crore
as against 184.795 MMT production in 2012-13 valued at Rs 7,84,652. An increase of about
2.40% in quantity terms and 10.22% in value terms has been observing during the year 2013-14
over 2012-13. The average international crude oil price was US$107.97/bbl. In 2012-13. Average
price of international crude oil during 2013-14 was lower by 2.27% as compared to previous year
2012-13. The trend in growth of crude oil imports and crude oil international prices is shown
below.
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India Petroleum and Other Liquids Imported

India is a significant importer of crude oil as the country’s demand and growth continues to
strip domestic supply growth. The Middle East is the major source of crude oil importer to
India, although the western hemisphere’s share has risen in recent years. India has increased
its total net oil imports from 42% of demand in 1990 to an estimated 72% of demand in
[Link] crude oil imports reached nearly 3.9 million barrels/ day in 2014. According to
Global Trade Atlas, Saudi Arabia is the India’s largest oil supplier with a 20% of share of
crude oil imports (fig. 4). Total 62% of India’s imported crude oil from Middle East countries.
The second largest source of imports is the western hemisphere 19% with majority of crude
oil from Venezuela 12%. Africa contributed 16% of India’s crude oil imports.

saudi arabia
7%
8% 20% iraq
iran
22% 14% vanazula
nigeria
6%
8% 12% other middle east
other africa
western hemisphere

Production and consumption of petroleum products

Production of petroleum products from Indian refineries has gone up from 217.736 MMT in 2012-13 to
220.756 MMT in 2013-14 i.e. higher by 1.39% as compared to previous year 2012-13 (table 4, figs. 5 and
6). During the year keeping pace with the economic growth trend, the consumption of petroleum products
in India has grown by only 0.73% and rose to 158.197MMT during 2013-14. Consumption of LPG
increased by 4.71%, petroleum coke increased by 14.96% in 2013-14.

Year Production % Growth in Consumption % Growth in

(MMT) production (MMT) consumption
2009-10 184.608 18.99 137.808 3.15
2010-11 194.821 5.53 141.040 2.35
2011-12 203.202 4.30 148.132 5.03
2012-13 217.736 7.15 157.057 6.02
2013-14* 220.756 1.39 158.197 0.73
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Impact of Crude Oil on Indian Economy

The recent rise in the price of the crude oil has drawn every one’s attention towards the crucial
role that oil plays in the economy of any nation. Crude oil is one of the most necessitated
commodities in the world and India imports around 100 million tons of crude oil and other
petroleum products. This in turn, results in spending huge amount of foreign exchange. The
increasing quantum of import of petroleum products has a significant impact on Indian
economy. Especially when crude oil prices are shooting globally. Crude oil not only serves as
a source of energy, but also a major raw material to various industries. It has been usually
observed that in India the pricing scheme is designed in such a way that it offers a system to
moderate the soaring international prices and thereby has direct impact on growth inflation.
According to a RBI Report (2005), for every unit of Dollar increases in crude oil price,
wholesale price (WPI) inflation rises by 30 basis points (Kaushik Bhattacharya etal.2005)
analyzed the impact of increase in oil price of inflation. They studied the mechanism of
increase in the prices of petroleum products on the prices of other commodities and the output
in India. In February 1999, from an all time low of 11 US$ per Barrel. The price increased the
peak of $35per barrel in the first week of September 2000. Due to this all importing countries
faced the threat of oil shock. India, being a major oil importer was directly affected by the
price rise. According to Bruno (1982), oil price shocks lead to increases in wages and prices
and decrease in real output.

Economic Background of India

With its 1 billion inhabitants the main sectors of the Indian economy are village Farming,
Modern Agriculture, Handicrafts, diversified manufacturing industries and the service sector.
India has capitalized on its large educated population to become a major exporter of IT service
& software workers. Thus services are the major source of economic growth, Accounting for
53.4% of GDP with only one Third of labour force. India was affected far less by the global
economic downturn than were many other nations of the world. India’s GDP grew up about
6.8% in 2008&2009. In 2010 the Indian economy rebounded robustly from the global
financial crises. The combined effect of the weak 2009 monsoon and inefficiencies in the
government distribution system. Fueled inflation towards peak value at 11% in the first half of
2010. After gradually decrease at a single digit in 2010 New Delhi reduced subsidies for fuel
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to lower the government deficit. The government of India seeks to reduce its deficit to 5.5%
of GDP in fiscal year 2010-2011 down from 6.8% in the previous fiscal year. However, as oil
importer country, an increase in oil price can damage the social India policy and increase
public deficit.

Background of prices
Global crude oil price moved between $10 and $20 a barrel between 1947-1972 (table 5).
There was a jump from $15 to $42 a barrel in 1973-1974, after that India GDP growth also
jumped to 4.6% from 0.3% decline the previous years, similarly crude oil declined 40% to
less than $12 a barrel in 1998-1999. When OPEC announced a quota increase amid showing
Asian economies. India’s GDP growth also slumped to an average of 5.5% in 1999from 8%
previous year. Again crude price declined 18% in 2002-2003 and India’s GDP growth also
remained a modest 4%. A year later 2004,GDP growth jumped 8% when crude price starting
rising in2004-2008,crude oil jumped again from $27 a barrel to over $98, due to multiple
factors-Iraq War, growth of Asian economies and weaker dollar India’s GDP growth rose from
8%to 9.3%. During the financial crises of 2008-2009 crude rates slumped sharply from $98 a
barrel to $50 a barrel and Indian’s GDP growth came down to 6.7% in 2009 from 9.3 the year
before.
According to Dhananjay Sintia, head of institutional Research at EMKAY Global Financial
services, “positive correlation exists between not only crude oil price and GDP growth but
corporate earning too. Recent crude price decline have been triggered by growth concern in
Europe, Japan and china’s causality runs from the growth to commodity prices. Second, there
has been decline of more than 100% in the demand & supply ratio of crude oil at that time.

Period Change in Crude Average change Change in Average change

oil in Crude oil Real GDP in GDP
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$15 to $42 $28.5 -0.3 to 4.6 2.45

1973-1974
$20 to $12 $16 8 to 5.5 6.75
1998-1999
$32 to $25 $28.5 5.4 to 3.9 4.65
2002-2003
$27 to $98 $62.5 8 to 9.3 8.65
2004-2008
$98 to $50 $74 9.3 to 6.7 8.00
2008-2009

Impact of Crude Oil Prices on the Indian Economy

India is the world’s third largest Oil importing nation and world’s seventh largest economy. It
is a major looser in the case of rising Crude price and a beneficiary in the event of falling
Crude prices. The pace at which the economy is growing, increases the need of the country to
import more and more of crude oil to meet the country’s industrial as well as domestic
requirements.
With U.S imposing sanctions with regard to purchase of crude from Iran, India stands to face
the double whammy of rising Crude prices as well as weaker rupee. India’s crude oil import
bill for 2018-2019 rose sharply in March 2018 as country is dependent for 80% of its
consumption needs on its Crude Imports. The CAD and Fiscal deficit are ballooning in the
event of Trade Imbalance.
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The Oil ministry pointed out to Bloomberg that India is more comfortable if Crude prices stay
near to $50, thus $70 is way too high and would pinch India’s economy in a big way going
forward if Saudi’s propel crude prices further to $80. To offset higher Crude prices the
government either has to reduce Excise duty thus impacting state finances or reintroduce fuel
price caps to control Inflation thus dent margins of Oil refiners.

Economic Impact of Crude price Rise

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Impact on Current Account deficit (CAD):

Current account deficit widens when value of imported goods exceeds the value of exported
goods, indicating how much India owes to the world in foreign currency. With India’s ever
increasing need for Crude to meet its consumption needs, which has grown from 77.3% in
2014 to 87.3% in 2018, the current account deficit also is widening at a faster pace thereby
inflating its Import Bill.

Widening CAD also puts pressure on the value of the Rupee and weakens it against major
basket of currencies. An SBI report suggests that Indian’s CAD could cross 2.5% of GDP for
FY 2019 (providing oil price continues at $80 per barrel). Currently CAD is estimated at
1.9% for 2017-18.

Impact on Fiscal deficit:

Rising crude prices adversely affects India’s Fiscal deficit which is the difference between
government’s total Income and total expenses. India imports around 80% of its annual crude
oil requirement which is approx 1.5 billion barrels a year from the world markets. Rising
crude prices increases government’s total expenditure thus impacting fiscal deficit negatively.
Fiscal deficit gives insight into the amount of money the government has to borrow to meet its
expenditure. Higher fiscal deficit to negatively impact India’s economy.

Impact on Rupee:

Rising crude prices affects rupee also adversely, as more money flows out of the system to
buy dollars for making crude payment. Thus sometimes RBI moves in to stem rupee fall.
Depreciating rupee has a weakening effect on the country’s economy. Rupee is at its life time
low leaving India in a vulnerable spot in the event of any further weakening of macros.
Weakening rupee benefits the exporters and is a big drag on the importers.

Inflation:
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Oil is a very essential commodity with daily necessity for domestic as well as industrial needs.
Oil is an essential raw material for many segments of the industry. Thus any increase in oil to
fuel Inflation in all segments like cost of producing goods to transport which would finally be
passed on to end users thus making goods very costly.

Impact on Economy:
Rising crude prices adversely affects the economy and dents its growth prospects taking into account all
the above factors. Most of the Indian Industries need crude for its Industrial need for the production of its
end product thus rise in crude increases their input costs and decreases margins. Thus some of the sector
getting negatively impacted would be Oil & Lubricants, Tyre, Paints, Plastics, Airlines etc. The
profitability of these Industries to be impacted due to rise in input costs. O
n the other hand the Oil exploration companies stands to gain out of it. The stock markets, the country’s
biggest economic revival barometer to weaken due to negative repercussions on Indian economy due to
rising crude. The midcaps and small caps are the worst hit as they will face problems passing on the input
costs to the end user. The economic revival thus would be very fragile with increasing CAD, weakening
rupee and rising fiscal deficit.

Decline in Crude price & Impact on Economy

CAD or Current Account Deficit:

India being the largest importer of Crude thus any decline in crude prices helps it to prune its
current account deficit upto the tune of Crude imports which accounts for one third of its total
import volume. Thus for this reason price of crude matters a lot to Indian economy. A fall in
oil prices by $10 per barrel helps reduce CAD by $9.2billion according to a live mint report.
Thus this impacts India’s GDP positively by 0.43%. Thus fall in Crude price to lower India’s
CAD and hence boost GDP growth.

Fiscal deficit:
The reduction in crude oil prices reduces the burden of subsidy from the Governments
shoulders thus in turn reducing the under recoveries. The government does not have to burden
itself with the subsidy burden as the reduced crude prices do not need the subsidy to be shared
between the Oil companies and the Government. The government expenditure reduces due to
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reduction in Import bill thus reducing fiscal deficit. Thus this will help the government in
pruning previous dues.

Inflation:
The reduction in crude prices affects as Indian economy as a whole due to its direct usage in
Transportation of goods and services. The Inflation reduces due to reduction in crude prices in
turn helping Industries dependent on Crude to increase profit and productivity owing to
reduction in their Input prices. The end user benefits as cut in direct costs is passed on by the
company to the consumers. Every $10 per barrel fall in crude oil price helps reduce retail
inflation by 0.2% and wholesale price inflation by 0.5%, according to a Moneycontrol report.

Impact on Rupee:
Rupee’s value is dependent on its demand in the currency market. A high CAD means a
country has to sell its currency and buy dollars to pay its bills thus any fall in crude decreases
CAD and strengthens rupee to that extent. The rupee still remains neutral to any decline in
crude prices as the weakening crude increases dollar strength being inversely related. Thus
negating any beneficial effect from decreasing CAD.

Conclusion
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The crude oil prices all across the globe have a significant impact on global economies
directly or indirectly. However, the increase in the crude oil prices results in increase in almost
all the consumable and non-consumable commodities. Any positive change in the crude oil
price has negative impact on the increment in GDP of a country. The Indian economy is not an
exception to the impact of change in crude oil prices. In India the demand for petroleum
related products is increasing at a rapid pace which results in increase in crude oil imports. In
case of any increase in crude oil prices a shock or impulse is visible which paves way for
strengthening energy efficient mechanisms in order to reduce the dependency on petroleum
products.

References
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