Bracing for the Changing Geopolitics: Ukraine Crisis and Energy Security in India
As Russian troops reach Kyiv, the capital of Ukraine, the Brent crude prices have already touched $110 a barrel, a level that was breached 8 years ago in 2014. The moot question, therefore, is, whether or not India was ready to anticipate and handle the consequences arising out of such a crisis with minimal disruptions. Taxes on petroleum, today, may be a major source of revenue but is also vulnerable to volatility impelling upon the need to look for an alternative but stable source of revenue to the government.
Nassim Nicholas Taleb, an essayist, mathematical statistician, a risk analyst, and a former option trader writes in his celebrated book ‘The Black Swan: The Impact of the Highly Probable’ that “a black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences”. As the occurrence of the unknown unknowns or forthcoming black swan cannot be predicted, this could not be a usable risk construct for the planners.
Russia’s action in Ukraine in February 2022, though was not an unknown event, as the possibility of the escalation in the conflict has been hovering over at least the past 8 years, the unpredictability of its impact on the global economy remains in the realm of guess. The moot question, therefore, is, whether or not India was ready to anticipate and handle the consequences arising out of such a crisis with minimal disruptions. Budgetary estimates regarding crude oil for the year 2022-23 were based on an average price of 70 to 75 dollars per barrel.
India cannot remain insulated from the impact of global geopolitics. As Russian troops reach Kyiv, the capital of Ukraine, the Brent crude prices have already touched $110 a barrel, a level that was breached 8 years ago in 2014. Crude oil-related products make for about 9 percent of the Wholesale Price Index (WPI) basket, which would mean that every 10 percent rise in crude would lead to 0.9 – 1 percent inflation in WPI, and 0.4-0.6 in the Consumer Price Index (CPI).
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In order to restrain inflation, if oil companies are not allowed to raise retail prices, they would suffer massive losses leading to disastrous consequences in the short to medium term. They have already suffered severe losses and been either cajoled or compelled to keep their retail prices unchanged during the two-month-long elections and had been hoping to recoup their losses rapidly post-election. This now appears less likely.
Visibly, India’s energy market will get significantly impacted. India meets half of its gas requirement through imports of liquefied natural gas (LNG). Even though India barely imports LNG from Russia, the current crisis may exert upward pressure on CNG and LPG prices, which would in turn jack up the fuel and electricity cost impinging the fertilizer industry quite adversely. It would move up the cost for industry and further enhance inflation.
South Korea, Japan, and India are the three major oil-importing countries in Asia. Respectively they meet 100, 99.7, and 85 percent of their oil needs through imports. Japan has decided to provide subsidies to its refiners and oil product importers so as keep the prices in control. At the same time, South Korea has reduced taxes on auto fuels by 20 percent for the next six months. Can India adopt a similar strategy to check inflation and boost demand in the economy?
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Taxes on fuels have become a major source of revenue. Last year, the revenue collection from excise duty on petrol and diesel was as much as Rs. 3.71 Lakh Crores as compared to a meagre Rs. 0.73 Lakh crores in 2014-15. So far, the government has held the position that reducing petroleum taxes would adversely affect the funding of welfare measures. The government may be under pressure to cut excise duties on petrol and diesel to contain fuel inflation but succumbing to this demand would cause severe revenue losses.
Additionally, a 10 percent rise in oil prices adds $15 billion or 0.4 percent GDP to India’s current account deficit which in turn leads to the rupee’s depreciation. While oil import presently constitutes 25 percent of India’s total import, it may go up due to depreciation in the currency.
Significant developments are taking place in geopolitics with obvious repercussions for global energy markets. Russian attack on Ukraine is just a recent addition to many ongoing, anticipated, and absolutely unanticipated instances. The consistent challenge to the west for its role in Europe by Russia, rising Pan-Turkism, Russia’s role in Georgia and Crimea, the conflict between Armenia and Azerbaijan, in addition to issues concerning the Black Sea, Eastern Mediterranean gas exploration, Cyprus, Iran, etc, are not only likely to change the world order but also to have serious ramifications in the world energy markets in future. These are not black swans but evidently visible ugly birds.
The changing world order and resulting conflicts are known, hence, planners cannot afford to be in denial mode. Taxes on petroleum, today, may be a major source of revenue but is also vulnerable to volatility impelling upon the need to look for an alternative but stable source of revenue to the government. This warrants a new fuel pricing policy capable of absorbing shocks emanating from changing world order and potential conflicts and supporting industry in addition to protecting interests of the lower and middle classes that are most vulnerable to high inflation so that demand can be sustained in the economy. It is known that we would surely be astonished in the future. Consequently, it is imperative for the planners to formulate a strategy against the impacts of intensely upsetting future shocks.
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