A K Bhattacharya: Exploiting the blessing of oil

Crude oil prices have remained relatively low for much of Narendra Modi's tenure so far

The Narendra Modi government has been distinctly lucky in one crucial area of the economy. Crude oil prices have remained relatively low for much of its tenure so far. Inevitably, this has had a positive impact on India’s macroeconomic numbers helping the Modi government put up a better show in managing public finances. But what has not received adequate attention so far is the manner in which the opportunity of low crude oil prices has been used by the government to roll out schemes and projects that should yield handsome political dividends for the ruling party in general and particularly in states that are preparing for Assembly elections in the next one year.

 

Remember that the price of Brent crude oil was $110 a barrel on May 26, 2014 when the Modi government took oath of office. By the middle of June that year, it rose to $115 a barrel. But since then, crude oil prices have remained relatively soft. It went below $100 a barrel by September 2014 and quickly slipped below the $50-mark by January 2015. Since then, Brent crude oil prices have been moving up and down in a range of $67 a barrel and $28. On Monday, it was hovering at around $47 a barrel. In sharp contrast, the second term of the Manmohan Singh government had to contend with a crude oil price that consistently stayed above $100 a barrel between January 2011 and May 2014.

Why lower crude oil prices play a key role in the Indian economy and government finances needs to be reiterated here. Almost 80 per cent of India’s total domestic consumption of crude oil and petroleum products is met through imports. About a fifth of its total import bill last year was accounted for by crude oil and petroleum products. This was higher at around 30 per cent when crude oil prices had not softened. 

Lower crude oil prices have a beneficial impact on government finances in two significant ways. One, the burden of petroleum subsidies as a share of total subsidies comes down as it did to around 11 to 12 per cent in the last couple of years, compared to over 30 per cent when crude oil prices were riding high during the tenure of the Manmohan Singh government. Two, the government can raise duties on petroleum products even as crude oil prices decline, without any impact on retail prices or inflation. This is exactly what the Modi government has been doing in the last couple of years. In contrast, the Manmohan Singh government could not pass on the entire burden of higher crude oil prices for fear of stoking inflation and in the process increased the burden of subsidies on government finances.

To be sure, the Modi government went beyond merely using the low crude oil prices for improving its finances. It also took a few baby steps to bring about the much-needed reforms in retail prices of petroleum products. Diesel prices were raised in small doses to remove the subsidy and are now linked to the market. Prices of kerosene and cooking gas too are being raised periodically so that they don't need subsidies. All these moves have helped the economy and the government's finances. But the petroleum and natural gas ministry, under Minister of State Dharmendra Pradhan, have launched two more initiatives whose political benefits would be immense for the ruling party.

Sometime early this year, the government launched the Pradhan Mantri Ujjwala Yojana that is aimed at providing subsidised cooking gas connections to 50 million households below the poverty line (BPL) over the next three years. The Union Budget for 2016-17 had even provided an allocation of Rs 2,000 crore to start the scheme. Even before the year is over, the government claims that 10 million new connections have been given, against the target of 15 million by March 2017. Take a look at the states which have cornered the benefits, you would realise its political significance. Uttar Pradesh has seen 3.4 million gas connections, followed by 1.02 million in Bihar, 1.3 million in Madhya Pradesh and 1.2 million in Rajasthan. There is little doubt that the scheme’s electoral dividends would be huge if it can be successfully implemented by the end of March 2019, just before the next round of general elections are due to be held. 

In perhaps a similar vein, the government launched yet another ambitious programme a fortnight ago — the Urja Ganga project that is aimed at laying a 2,539-kilometre long pipeline across the states of Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha to connect seven towns in these states with the national gas grid, thus providing city gas service to the towns of Varanasi, Patna, Ranchi, Jamshedpur, Kolkata, Bhubaneswar and Cuttack. The estimated cost for laying the pipeline is Rs 12,940 crore. The pipeline project will have many other benefits — it will create infrastructure in a relatively backward region of the country, paving the way for supply of gas to at least three fertiliser plants in eastern India and a large number of small and medium enterprises. The government expects investments of over Rs 50,000 crore in this region in the wake of the pipeline. 

Both the projects have been facilitated by the fact that prices of oil and gas have remained relatively low. If these had remained high as two years ago, the viability of these projects and their burden on government finances would have been more making the projects an unbearable financial burden and even unviable. If the government has gone ahead with these projects, it is largely because the benign price regime for oil and gas is a key helpful factor. Using low oil prices to launch projects that should yield political dividends is a politically pragmatic move and no assessment of the Modi government’s performance should ignore this.