India is on its way to make its biggest savings in the oil import bill this year with Covid-19 related disruptions and sluggish demand conditions squeezing down the country's crude payments to a fourth of previous years' level in the first two months of current fiscal.
In the period of April-May 2020-21, India's oil import bill has fallen to a meagre $5.4 billion as against $19.3 billion in the same period a year ago. Apart from lower oil prices, the quantum of imports in the two month period has also fallen to 31 million tonne (MT) from 39 MT last year.
The fall has been more stark in the month of May this year when the oil import bill stood at a mere $2.3 billion as compared to $9.5 billion last year. In fact, India's crude oil import in May fell 22.6 per cent to 14.6 MT, the biggest single month drop since 2005, as both fuel demand and refinery production was hit by Covid-19 disruptions.
Interestingly, between April and May, global crude oil prices have bounced back 60 per cent from a level of average $20 a barrel in April to over $30 a barrel in May. But compared to last year May's average crude price of over $70 a barrel, the current price are still at less than the halfway mark.
"The conditions this year are ideal this year for India to bring its oil import bill close to the halfway mark of FY20 levels. But it will depend on how oil producers respond to current disruptions and how long the current coronavirus crisis continues and controls the demand conditions. Oil price have risen this month to over the $40 mark, but could rise more if concerns about the prolonged presence of the virus gets re-established," said an oil sector expert.
As per the Petroleum Planning and Analysis Cell's (PPAC) provisional estimates, India's oil imports bill is expected to settle just over $100 billion mark in FY20. If it falls closer to $50 billion mark in FY21, the government would be able to cover its increased spending to pump up the economy in Covid times easily. Already taxes on petroleum products have been jacked up to mobilise additional resources for these unplanned expenditures.
While India imported crude oil worth $112 billion in FY 19, its import bill has transited substantially lower in the previous three financial years with oil import bill standing at mere $64 billion in FY16 when oil prices slipped on over supplies, especially with the entry of US shale oil.
Lower volume of crude processing by fuel refiners is also expected to have an impact on the import bill.
For India, lower oil prices acts as big incentive as the country depends on imports to meet 85 per cent of its oil requirements. Lower import bill would also have positive impact on country's fiscal deficit that had already slipped from earlier targets in wake on higher government expenditure this year to curb falling GDP growth.
The dependency of imported crude (on consumption basis), on the other hand, has increased from 82.9 per cent in FY18 to 83.7 per cent in FY19 and 85 per cent in FY20, meaning the country is producing less oil and depending more on imports to meet domestic requirements. This dependency has consistently increased in all five years of the last Modi government.
Crude production in India has stagnated around 35 mt for past decade. In FY19, domestic crude production has dropped to 34.2 mt from 35.7 mt in the previous year. Despite best efforts of the government, domestic oil production has not increased. Government has now pinned hope on its new Hydrocarbon Exploration Licensing Policy (HELP) that institutes an open acreage policy to see more investment in country's exploration and thereby increased production in coming years.