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Economy better placed to face oil import bill

Our Bureau

MUMBAI, Aug. 28

THE economy could face the current high cost of oil import better than the past episodes, according to the Reserve Bank of India (RBI).

The share of oil imports in the total import bill had fallen since the earlier oil price shocks. Besides, the sharp increase in domestic refinery capacity would enable the substitution of cheaper crude oil imports for costlier finished petroleum products , the annual report of the RBI, released today said.

India's oil import bill had grown four-fold between 1974-75 and 1990-91 to $6,028 millions and for the year 1999-2000 was $10,482 millions, accounting for 18.9 per cent of the country's total imports.

The report stated that the rise in the oil import bill during 1999-2000 was absorbed without any undue pressure on the current account deficit.

``As the demand for non-oil imports was moderate, the adverse impact of the oil price rise on inflation and output was contained by limiting its incidence on consumers,'' the report said.

According to the report, oil prices had increased substantially since 1999, after remaining subdued in the early 1990s and falling substantially between 1996-1998 as a result of production cuts by the Organisation of Petroleum Exporting Countries (OPEC) and higher global demand.

The report said it had a crippling effect on the balance of payments (BoP), apart from aggravating inflationary pressures and causing output losses. These `oil shocks' had caused the trade deficit to shoot up to high levels, leading to an increase in the current account deficit and loss of foreign exchange reserves.

India ranks high among developing countries in oil consumption. The total consumption of petroleum products in the country worked out to around 89 million tonnes during 1998-99 with an average rate of growth of consumption of 6.3 per cent during the 1990 s and an income elasticity of about 1.1 per cent.

According to the RBI report, oil price hikes typically generate cost-push inflation that leads to a fall in output and shifts in terms of trade. The recent increase in oil prices had come after a sustained ebb in inflation-adjusted oil prices. Moreover, the favourable global economic conditions and low underlying inflationary pressure had dampened the adverse impact.

However, the report stated that developing countries would be affected to a greater extent than developed countries as the share of developing countries in oil consumption was estimated to have risen from 29 per cent in 1973 to 43 per cent in 1999.

At the same time, the amount of oil consumed per real dollar of output had fallen by almost one-half in developed countries since the early 1970s due to the development of efficient oil conservation techniques, decline in proportion of heavy industries a nd the rise in `new economy' driven by information and technology, the report added.