THE GIST of Editorial for UPSC Exams : 17 October 2018 (Slippery slope: on India’s energy needs)

Slippery slope: on India’s energy needs

Mains Paper: 3 | Economy 
Prelims level: Not so important 
Mains level: India must diversify its energy basket more proactively

Introduction 

• India’s economic fortunes continue to be tied to the sharply fluctuating price of oil. 
• Prime Minister Narendra Modi urged oil-producing countries to reduce the cost of energy in order to aid the global economy in its path towards recovery. 
• Mr. Modi also called for a review of payment terms, demanding the partial use of the rupee instead of the U.S. dollar to pay for oil, in order to ease the burden on oil-importing countries in the wake of the strengthening of the dollar. 
• India clearly has a lot at stake as oil prices have risen by as much as 70% in rupee terms in the last one year. 
• This is not surprising given the absence of significant rival suppliers in the global oil market willing to help out India.

Resolving the issue 

• India’s policymakers now face the difficult task of safely steering the economy in the midst of multiple external headwinds. 
• The current account deficit widened to 2.4% of gross domestic product in the first quarter of 2018-19 and is expected to reach 3% for the full year.
• The rupee, which is down about 16% since the beginning of the year, doesn’t seem to be showing any signs of recovery either.
• The growth in the sales of petrol and diesel has already been affected adversely as their prices have shot through the roof. 
• All this will likely weigh negatively on the prospects of the Indian economy, the world’s fastest-growing, in the coming quarters. 
• In this scenario, the decision to marginally cut taxes imposed on domestic fuels is unlikely to be of any significant help to consumers. 
• What is required is a steep cut in Central and State taxes for the benefit to carry through to the consumers, which, of course, is unlikely given the government’s fiscal needs. 
• Another long-term solution to the oil problem will be to increasingly tap into domestic sources of energy supply while simultaneously encouraging consumers to switch to green alternatives. 

Way forward 

• This will require a stronger policy framework and implementation.
• In the short term, the government could look to diversifying its international supplier base to manage shocks better. But such a choice carries geopolitical risks, such as in the case of Iran.
• Since it will take a length of time to wean the economy off oil imports, policymakers should also be willing to think beyond just the next election if India’s over-reliance on oil is to come to an end for good.

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UPSC Prelims Questions: 

Q.1) India is world's third largest importer of crude oil after the United States and China. Oil imports in India are high and have soared up in recent years due to which of the following reasons?
a) India does not have sufficient crude oil reserves.
b) Oil Exploration activity in India is sub-optimal and remains much below potential levels.
c) Domestic crude oil production has been falling in recent years.
d) All of the above
Answer: D

UPSC Mains Questions:
Q.1) How India can diversify its own existing policy by not hammering the economic growth?