Iran's oil and India's fragile energy security

India’s economic managers might have heaved a collective sigh of relief over Washington’s decision to exempt India and seven other nations (including Japan and China) from a complete ban on importing Iranian oil, but New Delhi’s hand-wringing over the entire issue illustrates the essentially fragile state of India’s energy security.

Despite the realisation that the country’s huge and growing energy requirements need to be secure and largely immune to chance disruptions, India’s policymakers have been unable to put in place a reliable framework to ensure uninterrupted, stable energy flows in times of crises.

Washington’s decision to dishonour its nuclear treaty with Tehran and hammer on economic sanctions was sudden as well as unforeseen. But contingency planning is all about the unexpected. Fortuitous changes ought not to result in a breakdown of ordered processes.

While several key Asian nations, including Japan, South Korea and China, import vast quantities of Iranian oil and gas, none of them are staring at an impending crisis on account of the American demands to stop buying Iranian oil.

India, on the other hand, has been battered by the Iranian import squeeze. India’s dependence on Iranian oil has grown since 2015 when the United States eased sanctions on that country. Indian purchases of Iranian crude increased from 12.7 million tonnes in 2015-16 to 27.2 mt the next fiscal. Today, Iran is India’s third largest oil supplier after Iraq and Saudi Arabia.

Even before the US waiver, India has had to severely cut back on Iranian oil imports which are down by more than a half. Any decline in oil purchases from Iran disproportionately impacts India’s oil import bill and thereby its already precarious current account deficit.

The physical gap in oil imports can be plugged in the short and medium terms by resumption of higher levels of purchases from Saudi Arabia, Qatar and other Opec suppliers but this oil will invariably be significantly more expensive than Iranian oil and nothing will be given on credit. It would also reverse India’s unstated policy of reducing its dependence on Opec.

As it is, India’s external finances, roiled by a huge surge in its total oil import bill due to rising global oil prices, is in a potentially perilous state. The current account deficit has soared from 0.7 per cent of GDP in 2016-17 to 1.9 per cent in 2017-18, and is expected to cross 2.6 per cent this fiscal.

While this is not a complete calamity, financing the deficit could prove costlier than in the past. Slow export growth is an added worry.

Not surprisingly, the Indian rupee has proved to be the worst performing currency in Asia, falling by almost 16 per cent this year.

The adverse economic impact of this includes rising domestic inflation, depressed business sentiments, declining stock markets and a 27 per cent rise in fuel prices this year.

The problem is not Iranian oil per se, but India’s continued dependence on imports for its energy needs and a growing inability to pay for them. This mismatch is the basis of India’s energy insecurity, and not what Washington decrees from time to time.  Today, as much as 82 per cent of India’s crude requirements are met through imports.

India is the fourth largest oil importer in the world according to data available for 2017, when it imported $60.2 billion worth of oil, accounting for 6.9 per cent of world imports. In comparison, China imported $162.2 billion (18.6 per cent of total crude oil imports), the United States $139.1 billion (15.9 per cent) and Japan $63.7 billion (7.3 per cent).

Indian oil imports have no signs of slowing despite attempts at increasing alternative energy sources. In FY 2014, when oil prices were low, oil imports were 189.24 million metric tonnes, which went up to 213.93 million tonnes in 2016-17 and is expected to rise further to 219 million tonnes this fiscal (the petroleum ministry estimates are higher, at 228.6 million tonnes).

The Indian government estimates its oil import bill will surge by a thumping 42 per cent this fiscal — up from $88 billion in 2017-18 to $125 billion in 2018-19. This figure has been calculated on the basis of an average crude oil price of $77.88 per barrel and a dollar-rupee exchange rate of 72.22. But already the rupee is below that mark and could drop further before the fiscal year ends.

The current economic disquiet is a reflection of India’s inability to implement long-term measures to decrease its dependence on oil imports. This despite adequate realisation of goals and frequent enunciations on the need to diversify.

For instance, targets set for electricity production are impressive. Yet the political failure to revive the moribund power sector remains a huge barrier. State governments largely control the energy sector, including the sale and distribution of electricity. Years of corruption, inefficiencies, theft, transmission losses and the promotion of a freebies culture have eroded the financial capacity of most state electricity boards.

Power producers cannot get a fair or assured price for electricity, they cannot sell electricity freely and at times cannot even physically carry power to consumers who are willing to pay due to lack of transmission capabilities. In some cases, state governments are unable to pay for power from private companies as agreed upon simply because they do not have the cash.

Similar problems have cast a shadow over the country’s praiseworthy renewable energy production targets. Moreover, unanticipated policy changes like last year’s “safeguards duty” on solar equipment imports coupled with the reluctance to incentivise investors in these sectors has slowed if not halted progress.

Solar tariff rates have hit rock bottom and state governments are insisting on the lowest rates for new solar energy projects. This coupled with uncertainties in the policy environment, the falling rupee and so on have rendered many solar projects unviable.

Last month, the government-run Solar Energy Corporation of India (SECI) reported that it had not received a single bid for its auction for 1,200 megawatts hybrid projects. If this sort of thing becomes a trend, then Prime Minister Narendra Modi’s ambitious plans for renewable energy capacity building will be yet another colossal failure.

The problem is not of intent but of implementation. The system, still weighed down by India’s socialist past, is caught in a mindset that favours political sops, unending subsidies and write-offs paid by the taxpayer. Given this dynamic, the quest for energy security could be a Sisyphean endeavour. This should be the real worry for India’s economic policymakers, not just the issue of a mere 10 or 20 million tonnes of Iranian oil.