Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Russia’s offer of cheaper oil is tempting, but India must be cautious

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Export to GDP ratio of India

Mains level : Paper 3- Issues in buying cheaper oil from Russia

Context

With oil above $100, the government now has to spend twice as much to import oil as it did earlier. Russia has offered to sell oil at lower prices to India. It is a hard temptation for India to resist. But one that comes with profound and long-lasting consequences.

Issues in buying oil from Russia

1] Impact on India’s export due to threat of the secondary sanction by the US

  • The demise of the Soviet Union made it easier for India to abandon the Soviet-influenced ideology of a planned economy and veer towards the American version of a market economy.
  • Now, in the reverse ideological direction, Russia’s offer of cheaper oil has hidden and direct costs that India will have to deliberate upon.
  • Whenever global crude oil prices have risen above $100 in the past, India was able to cushion that shock primarily through growth in exports.
  • When oil prices were similarly high, exports rose to nearly 25 per cent of nominal GDP, which helped India withstand the shock.
  • However, exports now have fallen dramatically to 18 per cent of GDP, which must be revived.
  • The US is India’s biggest export market.
  • The US has already cautioned India about abetting Russia by buying Russian oil.
  • It remains to be seen if the US will impose secondary sanctions against India for buying discounted Russian oil, but that threat looms large.

2] Cascading de-dollarisation

  • With US sanctions against Russia, it will insist on payment in rubles.
  • If India is forced to accept trading in rubles with Russia, then it is very likely that China, which is India’s second-largest trading partner, may also insist on payments in Chinese yuan.
  • Saudi Arabia may also insist on trading in a currency other than the US dollar.
  • This cascading “de-dollarisation” phenomenon will further irk and antagonise the US, since it weakens the dollar’s status as the world’s reserve currency.
  • If India is forced to purchase Russian oil in rubles and potentially trade in yuan with China and others, it can catapult India into the centre of a geo-economic war that it can ill afford.

Opportunity for India

  • The Russia-Ukraine conflict can be an opportunity for India to step up and capture global market share in goods and services.
  • There is already talk of India capitalising on wheat exports, albeit a tiny share of India’s overall exports, as a fallout of global sanctions against Russian wheat.

Conclusion

Exports remain India’s biggest hope for a long-term sustainable economic recovery with ample job creation. India cannot risk being isolated in future global trade for near-term discounted oil deals with Russia.

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