India’s Obsession with Oil

By Travis D’Souza

Introduction

India’s economy is fueled by crude oil. Since oil is so important to India and its economic prosperity, obtaining units at the right price is crucial in order to spur financial growth. In a recent interview on April 11, 2018, Indian Oil Minister Dharmendra Pradhan stated that India wants to see prices at around USD $50 per barrel in order to better manage its finances (Times of India, 2018). Saudi Arabia is the largest crude exporter in the world and is also competing to be India’s top supplier. In order to compensate for their own crowded domestic agenda, Saudi Arabia is looking to sell their barrels at USD $80 each. India imports close to 80 percent of its crude requirements and has been diversifying its sources of oil supply in the Middle East while also seeking more favorable deals from exporters. This blog post will analyze India’s fascination with oil and how that directly relates to economic growth within its borders. Additionally, an alternative to oil consumption will be discussed.

Economic Growth Measures

Although economic growth makes development possible, rapid rates of growth alone do not cause financial well-being across an entire population (Schaffer, 84) . If a country has a positive economic growth rate, the incomes of its inhabitants rise on average, but it does not specify the poor households. In addition to the economic growth rate, economists use indicators to determine how the widespread increase of income benefits poorer families. Two of the indicators that will be discussed are poverty and inequality.

Poverty occurs when people experience well-being below a predetermined threshold. A common benchmark for evaluating poverty is the poverty line. A poverty line indicates the minimally accepted level of well-being for a household. Those who are below the line are classified as poor, whereas those above the line are not poor. The international poverty line was set to USD $1.90 a day in 2011 (World Bank). India’s poverty headcount ratio was 21.2% in 2011, which meant that 21.2% of Indian households lived in poverty.

Inequality exists when one household lives at a level of well-being lower than that of another household. Per capita household income is the most common statistic used to measure inequality. India’s nominal per capita income in 2016 was USD $1,670, ranked at 112 out of 164 countries by the World Bank. India has one of the fastest-growing economies in the world, but the continued rise of income inequality within its borders is alarming. Last year, India’s top 1 percent held close to 58 percent of total wealth. This year, India’s top 1 percent owns an astounding 73 percent of the country’s total wealth, which is at all all-time high (Times of India, 2017).

India’s Oil Issue

India’s economic development has drawn comparisons to that of China – a nation that has experienced substantial growth over the past few decades. A key difference between the two countries is oil. Thanks to the wealth of onshore and offshore reserves in China, it is currently the fourth largest producer of crude oil behind the United States, Saudi Arabia, and Russia (Bloomberg). On the other hand, the lack of Indian domestic crude reserves has made it the world’s largest energy importer for decades. India’s domestic oil production as a percentage of domestic oil production has dropped 14 percent since 2011 according to Ministry of Petroleum.

According to David Fickling of Bloomberg Gadfly, India is using the wrong fuel and should deeply consider switching to electricity.

“There are sound macroeconomic reasons for India to switch to electricity. The country’s domestic reserves of lithium are if anything less significant than its oil endowment. But an electric car uses that metal only when it’s manufactured, whereas a conventional one drinks oil year-in, year-out” (Bloomberg Gadfly).

The amount of oil consumption in India has also led to its capital of New Dehli being listed as the world’s most polluted city according to a 2014 World Health Organization study. By the same WHO study, half of the 40 most polluted world cities are located in India. Projections have shown that India will be the third-largest car market by 2019. The International Energy Agency projected that oil demand will reach 7.1 million barrels a day by 2030, with Indian domestic production only producing 0.4 million barrels during that same span. If India does not shift its focus to a less crude-dependent path, this sustained import dependence will prove to be detrimental to its economy. The graph below depicts India’s production and consumption of petroleum and other fossil fuels (EIA).

India Petroleum Graph

Women, Economic Growth, and India’s Energy Sector

Despite its economic advances, India’s gender balance in the labor force, entrepreneurship, and growth remains among the lowest in the world. History has shown that economies grow when more women work (OECD). Additionally, when women have access to a greater share of the household income – either through their own earnings or cash transfers – spending changes in ways that benefit the children (World Bank). Madhya Pradesh – an Indian territory – was home to a large-scale gender mainstreaming program that fundamentally improved the state’s energy sector.

Madhya Pradesh is India’s second largest territory that boasts a population of 75 million people. The territory has been historically notorious for growing at a much slower pace than the rest of India’s economy. From 1999 to 2008, Madhya Pradesh’s GDP grew only 3.5 percent annually (LEDS). Looking to provide economic alternatives for these communities, the Asian Development Bank created the Madhya Pradesh Energy Efficiency Improvement Investment Program in 2011, the first part of which was categorized as Effective Gender Mainstreaming. The funds provided by this program delivered tangible benefits to women by improving their access to energy resources, services, and energy based livelihoods through women’s self help groups and micro-entrepreneurs (LEDS).

Conclusion

India’s obsession for oil is reasonably justifiable – the valuable resource leads to increased economic growth, and India simply does not have the means to produce it in large quantities domestically. Positive economic growth does not however relate to equality among households within the population. That is why more attention and priority should be used towards electricity and more efficient forms of energy.

The efforts in Madhya Pradesh to use green energy not only helps reduce pollutants harmful to the population, but also decreases the inequality gap between men and women by giving women more responsibility and earning power.

References

Bloomberg. “How Saudi Arabia Can Hurt India’s Economic Growth – Times of India.” The Times of India, Business, 11 Apr. 2018,                  timesofindia.indiatimes.com/business/india-business/how-saudi-arabia-can-hurt-indias-economic-growth/articleshow/63710331.cms.

PTI. “India’s Rising Income Inequality: Richest 1% Own 58% of Total Wealth – Times of India.” The Times of India, Business, 16 Jan. 2017, timesofindia.indiatimes.com/business/india-business/indias-rising-income-inequality-richest-1-own-58-of-total-wealth/articleshow/56586277.cms.

Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis. Wiley, 2014.

Fickling, David. “India Chases the Wrong Fuel.” Bloomberg.com, Bloomberg, 8 July 2016, www.bloomberg.com/gadfly/articles/2016-07-08/take-a-deep-breath-india-and-switch-to-electric-cars.

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Author: Econ 416 Student

Entries are contributed by undergraduate students enrolled in Economics 416: Theory of Economic Development at the University of Maryland.

3 thoughts on “India’s Obsession with Oil”

  1. Peiyuan Luo: It is interesting to learn that oil is such a big demand in India. Oil demand is large and continues increasing in India, however, India falls behind on oil production. If the trend continues, India will be heavily dependent on importing oil and it will affect its economic growth. It is also good to see that author brought up the fact that gender imbalance in the workforce. The program like Madhya Pradesh Energy Efficiency Improvement Investment Program can not only help reducing pollution but also encourage women in the technical workforce.

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  2. Good job in explaining the different measures of economic growth, and the two different economic problems facing India. I thought the notion of connecting both solutions together to be smart. By shifting India’s economy to invest more in renewable resources, will provide an opportunity for women to participate more in the workforce. Especially since women will be able to be trained alongside men to take on these new subsets of jobs. However, education isn’t available to everyone, so I wonder if there would be more of an income gap between to the rich and poor assuming that people that are below the poverty gap are not able to take advantage of this new labor demand.

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  3. I never thought of oil as an important part of India’s economy, possibly because there are larger competitors in that region that contribute more to the industry. There was a parallel between many articles of countries experiencing economic growth but still in poverty because the growth is not uniform throughout all households in the country. It’s interesting how the author presents oil as a large part of the economy, but it ultimately leads to the detrimental side effect of pollution, which would cause more long-term and negative problems. I was surprised to learn in the section about “Women, Economic Growth, and India’s Energy Sector” how women actually have a greater share of household income through their own earnings and cash transfers. It made me wonder if it’s related to the idea we covered in class of men possibly spending it on “sin goods”. However, this is good because it bridges the gap between men and women in the country.

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