How oil based economies like India depends on oil?

Introduction-
Oil and gas sector is among the eight core industries in India and plays a major
role in influencing decision making for all the other important sections of the
economy. Also India is heavily dependent on coal and foreign oil imports for its
energy needs. Despite a slowing global economy, India's energy demand
continues to rise. While India's domestic energy resource base is substantial, the
country relies on imports for a considerable amount of its energy use.
According to the EIA, in 2011 India had approximately 5.7 billion barrels of proven
oil reserves, the second-largest amount in the Asia-Pacific region after China,
primarily light and sweet crude. In 2010 India produced roughly 750,000 barrels
per day crude oil enough for two weeks of consumption only.

How far is India dependent on oil?

Let us understand how far, India is dependent on oil imports or fuel imports. Now
India imports over 80 percentage of its crude oil. So 80 percentage of its crude oil
requirements are met by imports and these Imports are mainly met from those
countries like Iraq, Saudi Arabia and Iran. So these are the three major economies
which imports oil to India. Now coming to India's import dependency in its energy
mix. It has also increased from 21 percentage in the year 2000 to 36 percentage in
the year 2015 and it is expected that by 2040. This will increase to 50 percentage. So
generally we can say that there is a rising import dependency for India, especially
with regard to oil and fuel requirements.

Data showing India’s import and production is given below-

Why India is dependent and current challenges-
Modernization-
Now moving on to the current challenges of India, with regard to import of fuel and
oil. India is a developing economy, which is focusing more on development. It
definitely includes modernization dimension so, when an economy get modernized,
there will definitely be more demand for oil and fuel. So, increase in the aggregate
demand in the economy, which is caused due to modernization, or in the process of
modernizing the economy is definitely a challenge for India. Thus with more
developmental needs for the economy, with more focus on increasing output on
increasing infrastructure or modernizing the economy, there will be more needs on
fuel and oil. So, as we have discussed in the beginning 80 percentage of the crude oil
requirements of the country is met. Only by imports. So, this import dependencies,
expected to increase.
Lack of oil resources-
Secondly, India has, lack of resources for all gas and metallurgical coal. So, lack of
resources and increase in demand, whenever there is an increase in demand. This
has to be met by supply. So, supply can be from both domestic sources and outside
sources or external sources, but in case of India, there is a lack of domestic sources,
so the demand has to be met by supply which is available from external sources, and
this is what we call us import of commodities. So here, in case of India's oil
requirement and fuel requirements, since there is no option for domestic availability
of the resources, India has to depend on external economy through import of oil and
fuel. Now it is seen that the demand for imports of oil and fuel is expected to
increase, this import dependency, and rising import dependency will definitely have
a consequence on the external balance that is on the BOP (balance of payments),
and it can also cause a macro economic instability.

Macro-economic stability-
The macroeconomic stability would be hampered, and also the balance of payment
would be in crisis, For example, a spike in the price of oil will increase the inflation
levels, as we discussed in the beginning. So inflation is a major macro-economic
parameter that determines whether we have a stable economy or not. So it will
definitely have a challenge on inflation, and this will have an impact on fiscal deficit.
It will also have an impact on balance of payment, we can say that the
macroeconomic stability would be in a crisis or economy will move towards an
economic crisis, in case of increased or rising dependency or an over dependency on
imports for oil and fuel requirements.

Shortcomings-
Now let us also understand what the alternatives that are available for India. And
why are they not much effective?
Coal
One of the alternatives that is available in India is, Coal. So India has an extensive
resource of coal. But there are certain challenges or drawback with this resources of
coal.
The first major challenge is the quality of the coal, so even though there is
abundant, availability of coal sources in the country, most of them are not of the
quality that is required. In order to ensure that the coal is of standard quality, and
also it can serve as a clean fuel. This call needs to be processed or washed. So in
the process of washing or processing. This will need huge amount of water but
hear the availability of water. In water stress areas around a cold plant would be a
challenge. For example, the Vidarbha district of Maharashtra, it is a water stress
area, and in such areas this can lead to ecological imbalance and also the effects
of coal fired plants emissions, the emissions can lead to health consequences or
environmental degradation because mostly the emissions are of greenhouse
gases, and this will have a direct impact on the health of the people living in the
area and also on the ecology and environment of the area to considering this
drawbacks, we need to find out some other alternatives as well, along with the
coal.
Renewable energy resources
The second alternative that is available is renewable energy sources. So
renewable energy sources means those energy sources that can be renewed, or
replenished in a certain period of time. For example, solar energy, wind energy
exedra are considered to be renewable energy resources because they can be
renewed, or they can be replenished, in a period of time, but such type of
renewable energy sources also has certain challenges or shortcomings, for
example, the solar energy. They are variable in terms of output, it means that the
solar firms will produce energy, only when the sun is shining. Another example
wind energy. They are also variable in terms of output because the wind farms
can produce power only when the wind is blowing, so there are certain
shortcomings for renewable sources of energy as well.

In this context we will see what the way ahead for India is. So in the beginning we
have discussed that India has to come up with strategic measures in order to
avoid any kind of macroeconomic instability or any economic crisis due to excess
of imports. So, what can be the strategic methods? One example of such a
strategy, measure would be to ensure sufficient reserves are available in India. So
this reserves will help India to survive in a critical situation. For example, when
the prices of imports goes up, India can ensure or should ensure reserves so that
it can use resources from the reserves at the time of crisis, in order to ensure that
there will not be a macroeconomic instability, And in this regard, India has already
made strategic oil reserves in cooperation with UAE and Saudi Arabia, so this can
be seen as a very good step from the part of the government, so when there is a
reserve available when the demand is high, and when the supply is less definitely
there is a tendency for a price rise, which will lead to a cost push inflation in the
economy. So, at that time what the government can do is, the government can
release the reserves, and it can meet the increasing demand and the gap that is
cause you to decrease in supply. So, this will not create a rise in the prices, and
there will be macroeconomic stability, for example, there will not be excess rates
of inflation, there will not be widening of fiscal deficit etc. So, this is the
advantage of reserves.
Now, secondly, the governments, and the policymakers should try to maintain a
healthy balance of trade. So, balance of trade does not have just one component
that is import of oil and fuels. So balance of trade is usually dependent on
exports, as well as imports. So, it is not just imports that is counted in balance of
trade, it is export also which is counted. So in order to maintain a healthy balance
of trade, what can be done, the exports can be increased. So in order to meet the
excess imports, or the import bills, we can increase the exports. So the
government and the policymakers should focus on export oriented sectors, or
export intensive sectors in order to increase the quantity of the exports from
India so that we can maintain a healthy balance of trade. So this will help in the
long run. So for a country like India, which does not have enough resources to
produce fuel or oil or energy requirements from its own territory, and we are
highly dependent on imports, what can be effectively done is to increase the
exports, so that we can maintain a healthy balance of trade, and thereby the bop
situation will normalize the currency will be stable. The inflation rates will also be
stable and thereby finally we can achieve a macroeconomic stability.