India Should Use Low Crude Oil Prices To Forge Strategic Partnerships

The world has seen a precipitous decline of crude oil from $120 in Jun 2014 to around $50 today. This decline of crude signals the end of the super cycle of commodities which had supercharged economic growth and welfare policies in oil and commodities exporting countries.

Today, Brazil President Dilma Rousseff is facing impeachment trial on grounds of corruption in Petrobras, a Brazilian oil public sector company. But the reason behind her troubles is that the opposition parties in Brazil are capitalizing on the resentment among Brazilians due to increased unemployment and economic distress. Brazilian government in a bid to provide stimulus to the economy had embarked on high public spending which gave rise to inflation and to control it, its central bank had to raise interest rates which further constricted economy.

Another Latin American country Venezuela where its charismatic Late President Hugo Chavez heralded the advent of a leftist welfare state based on a windfall of high crude oil prices is facing near economic-social meltdown.

Low prices have also put a spanner in the works of OPEC which failed to arrive at any cut in crude oil production to shore up crude oil.

Arab spring which spiraled into region-wide civil war has worsened amid falling oil prices. This has impelled many unemployed youth to join jihadist for money.

But, the decline in crude oil has been heaven sent economic bonanza for India which imports over 75 per cent of its requirements. According to experts, decline of crude by $25 means nearly $10 billion stimulus to the Indian economy. Due to fiscal concerns government decided to appropriate most of the gains by hiking excise duty. This didn’t result in a proportionate decline in oil prices for consumers but led to macroeconomic stabilization of Indian economy by subduing inflation and keeping the fiscal deficit at targeted road map and meeting this year’s target of 3.9% fiscal deficit. This macroeconomic stability combined with other economic policies has enabled India to emerge as the fastest growing major economy in the world.

India’s economic growth like other countries is vitally dependent on energy resources. And currently, most of the energy resources in the world are still fossil fuel based of which India is short of, except coal. While bringing efficiency in coal mining government has significantly eased the power shortage issue and shored up coal stocks in the power stations. The IEA expects India’s energy demand to increase at the fastest rate in coming years. Current decline in oil prices also enables India to ramp up its defence capabilities and secure its economic and strategic interests.

Crude oil prices are limping back to normalcy. The main reasons for this recovery are: sabotage in Nigeria leading to a loss in crude oil capacity and a major accident in Canada taking off 1 mbd capacity off the market and other outages.

While cheap oil allowed inflation to cool and help it achieve lower trade and fiscal deficit, it endangered India’s exports as lower oil prices weakened already weakened global economic prospects. Remittances from gulf countries have declined. The interest in exploration in under-explored Indian sediments has waned. While this is expected to reverse by the advent of new revenue sharing model but current low price regime gives India some unique opportunities to exploit, especially to form strategic partnerships with the oil exporting countries.

An example of such strategic partnership is Chinese partnerships with large fossil fuel exporter countries. China formed extensive $400 billion worth gas import partnership with Russia in 2014 when Russia was troubled by low gas prices and western countries economic sanctions. This allowed China to secure its energy requirements substantially for long term (20 years) at a cheap price and also enabled it to put its relationship with Russia on firmer footing. In recent manoeuver, China has entered into oil for loan scheme with cash-strapped Venezuela. This would provide vital cash to Venezuela while securing long term cheap oil supply for China. Moreover, China through this deal has strengthened Venezuela as its ally and can count on its support for Chinese leadership in an international forum.

India’s crude oil and gas consumption is going to increase in coming decades as it tries to grow by expanding its economy. At the down cycle of commodities, deals are easier to strike with more advantage. Moreover, it would diversify its crude basket bringing strategic stability and would expand its economic affairs which would lead to an expansion in its export markets.

A start can be made in Iran which has emerged from western sanctions and is key for India to access central Asia. India should enter into long term contract of fuel supply from Iran while starting negotiation on stalled Iran-Pakistan-India gas pipeline.  India has partnered with Brazil on many international forums like BRICS, IBSA, G-20. This partnership can be taken further by India’s investment in Brazil’s commodity sector or iron, copper and oil. Moreover, India has been conspicuous by its absence from Latin American economies; it does not even have embassies in all of them. This is a golden opportunity to increase its interaction with commodity exporter countries like Venezuela, Chile – while it will no doubt increase economic diversification and hence international trade of India but also help in furthering India’s strategic interests.

India along with Japan, Germany and Brazil is lobbying for reform in UNSC along with permanent membership in vaunted UN Security Council. While UNSC reform depends on upon P-5 but pressure from other member countries of UN will hasten the reform process. India enjoys support from many countries in this quest it could be widened by having a greater economic partnership with commodity exporting countries.

Today’s world while has one superpower but importance of multilateral forums is increasing in deciding international terms of engagement. China is already pushing its views on using its extensive economic muscle in promoting One Belt One Road initiative, maritime Silk Road and China-Pakistan economic corridor to India’s distaste and alarm.

India with the new status of the fastest growing economy, stable macroeconomic fundamentals should begin in earnest its search for strategic partnerships with commodity exporter countries too.