Tinkering with monetary policy will not be enough to arrest the rupee’s fall. This is apparent enough given the main structural cause underlying the fall. Other factors such as weak export markets and the anticipation of the US Federal Reserve tapering off quantitative easing may play a role or serve as catalysts, but culpability rests for the most part with India’s widening current account deficit.
Given the role oil imports pay in that calculation last fiscal, India ran up a tab of $170 billion Prime Minister Manmohan Singh’s push to shave $25 billion off that bill follows naturally. But while Oil Minister Veerappa Moily’s plan to hit about $8.5 billion of that target by increasing oil imports from Iran may work in the short term, it is more in the nature of a band-aid than a lasting solution or in the case of the proposal to reduce demand by shutting down petrol pumps at night, not even that.
As matters stand, the only certainty about political and strategic equations in the Middle East is that they may alter at any time. US President Barack Obama is in the process of seeking Congressional approval for a strike against Syria; oil prices have already risen in anticipation of the turmoil such a military intervention could cause. If he secures that approval, matters will worsen a great deal -- particularly given that Iran is Syrian President Bashar al-Assad’s main sponsor and has unequivocally warned against any strikes.
Even if Washington backs off, the chaotic situation in the Middle East is not likely to resolve itself any time soon.
Looking at Iranian imports as a long-term solution would be fraught with uncertainty, under the circumstances; at the least, spiking prices could potentially slow India’s GDP growth by 0.2 per cent according to Goldman Sachs.
The real problems and, consequently, the real solutions lie at home. Currently, India imports about 70 per cent of the oil it consumes. According to the Planning Commission’s Integrated Energy Policy, this import dependence is set to rise to 90 per cent by 2030. This is simply not sustainable from an economic perspective.
There are two main issues factoring into this; the stagnation of domestic oil production and getting the energy mix right. As far as the first goes, inadequate upstream infrastructure is a major hurdle. There has been under-investment in this area in the past, and matters are worsening now.
Later amendments to a strong regulatory framework have created a lack of clarity that is causing a dearth of interest and participation in New Exploration Licensing Policy Rounds, thereby forestalling investment. And downstream, fuel subsidies have impacted the financial health of state-owned oil marketing companies in a major way, which prevents them from investing upstream.
As far as getting the energy mix right goes, India’s massive coal reserves are currently heavily under-utilised due to the systemic inefficiencies caused by the Coal India monopoly.
There is scope here for shifting to greater coal use coupled with investment in clean coal technologies. These are not easy issues to address, nor are they quick-fix solutions; it will require political will to debate and address them. But it must be done; Iran is no real solution.