Can India kick its imported oil habit?

US sanctions against Iran mean India is losing out on a key source of cheap oil, likely hurting government finances.

India trucks
India's transport companies are among the many businesses and individuals who are feeling the squeeze of rising fuel costs [File: Rajanish Kakade/AP

Mumbai, India – Across the water from Mumbai’s main peninsula, in an office building that houses the city’s transport hub, Vilas Kadam flicks through a thick binder containing the week’s fuel bills. His fleet of trucks moves steel from the nearby Jawaharlal Nehru Port to sites around the country and the prospect of rising fuel prices is giving him a headache.

“Diesel makes up over half of my costs so even a slight increase means I suffer,” Kadam told Al Jazeera. After paying for his drivers’ accommodation, food and truck maintenance, there is not much left over.

Competition is fierce among the hundreds of nearby haulage firms and there is no union to collectively set prices, says Kadam. If his fuel costs rise, he has to pass some of the increase on to his customers, and absorb the rest himself. “My insurance bill has also been rising, so margins are already tight,” he said. “No one is getting rich here.”

Business owners like Kadam are likely to face higher fuel bills following India‘s decision to stop importing Iranian oil, a source of cheap crude.

India’s ambassador to the United States, Harsh Shringla, confirmed last month that oil imports from Iran stopped on May 2 to comply with US sanctions as a waiver exempting India, and seven other countries including China and Brazil, expired.

The US government has said it wants to bring Iranian oil exports down to zero in a move designed to hurt the Revolutionary Guard, the state security agency, which the US has designated a “terrorist organisation”.

As the world’s third-largest oil consumer, and with 80 percent of its demand met by foreign imports, India could be one of the countries hit hardest in the diplomatic crossfire between the US and Iran, as it is forced to try and find cheaper sources of crude.

Up to 10 percent of India’s oil imports came from Iran in 2018, valued at $129bn, according to data from the Centre for Monitoring Indian Economy (CMIE), compiled by CARE Ratings.

And a spike in oil prices following recent attacks on tankers in the Gulf and the shooting down of a US military drone by Iranian forces on Thursday could also bump up India’s energy import bill.

Trade talks are likely to take centre stage during US Secretary of State Mike Pompeo’s visit to India next week, amid signs of growing tensions between the two countries. India recently imposed punitive tariffs on 28 US products including almonds, apples and walnuts in retaliation for the Trump administration’s imposition of tariffs on Indian steel and aluminium last year.

India oil imports 1
Rising costs of imported oil are hurting Indian business owners like truck operator Vilas Kadam [Tish Sanghera/Al Jazeera]

Analysts say India should be able to find alternative supplies of oil reasonably easily, as the Organization of the Petroleum Exporting Countries (OPEC) could increase production to compensate for a drop in Iranian supplies. But plugging the gap left by Iranian oil will be expensive, they say.

State-owned refineries, which make up 18 of India’s 23 refineries, will suffer the most, Lydia Powell, head of the Centre for Resources Management at the Observer Research Foundation, told Al Jazeera.

They will lose the favourable terms that came with Iranian oil such as extended credit lines of up to 60 days (double the standard 30-day period offered by other suppliers), as well as the ability to pay Iran in Indian rupees following an agreement signed between the two countries in late 2018. Rupee payments help strengthen India’s currency by reducing the demands on its US dollar reserves.

Rising import bill

Two leading economists at the Jawaharlal Nehru University in New Delhi warn that a larger crude import bill will widen India’s current account deficit while government finances are already stretched. This could reduce foreign currency reserves and potentially lead to the rupee’s depreciation. If higher fuel prices ripple through the economy, inflation could also rise, bringing down consumer spending and hurting economic growth.

Indian consumers have previously been cushioned from market fluctuations. New Delhi intervened in late 2018 as fuel prices rose. The federal government reduced excise duty, ordered states to cut taxes and mandated oil marketing companies to absorb higher prices.

The government could intervene again, although this would hurt its finances, Karthik Ganesan, a research fellow at the Council on Energy, Environment and Water (CEEW), told Al Jazeera.

At around $28.7bn, taxes collected from the sale of petroleum products are among the “highest sources of indirect tax revenue for the government”, he said, adding that it “will not want to forego this income for too long”.

Ganesan says India’s new government now has a difficult choice of either “keeping the populace on side” post-elections and steadying fuel prices, or allowing them to rise along with market forces.

Many analysts expect it to do the latter, estimating a three to five rupee ($0.04 to $0.07) increase at petrol pumps in the coming months as the government is forced to find expensive alternatives to Iranian oil. This could lead to a rise in the price of goods and hit household wallets as heavy fuel-consuming businesses, like Kadam’s transport firm, pass on higher costs.

For Rajesh Lokhande, 50, a coconut trader in Mumbai’s main wholesale vegetable market, such increases are “part and parcel” of his business.

India oil imports 2
Rajesh Lokhande, owner of a coconut trading firm in Mumbai, says he has become accustomed to rising fuel prices [Tish Sanghera/Al Jazeera]

“We’re all used to such price hikes and a sudden increase happens all the time after state elections too,” he said. “We have to preserve our margins, so if it costs us more to transport our goods, we automatically price that in,” Lokhande added.

Tara Laan, an associate at the International Institute for Sustainable Development, a think-tank, told Al Jazeera that rising oil prices will also “escalate” the government’s “substantial” liquid petroleum gas (LPG) subsidy bill – valued at $3.2bn in 2018 or four percent of India’s trade deficit.

Subsidies may be aimed at helping the poor, through a nationwide campaign to distribute cooking gas. But currently they are also enjoyed by many better off, middle-class families, keeping consumption levels high.

The clean energy solution

One solution to India’s reliance on imported fossil fuels could be renewable energy.

Geopolitical events frequently underscore India’s exposure to expensive oil and gas from abroad, says the CEEW’s Ganesan. “Each of these shocks set us back,” he says, adding that such events should help galvanise public support for alternatives to fossil fuels.

India has said it aims to build 175 gigawatts (GW) of renewable energy capacity by 2022, up from 75GW at the end of last year, and its plan is attracting significant support from foreign investors. Among developing economies, India receives the second highest level of investment into renewable energy, according to the CEEW.

“A lot of pension funds are looking for ethical investment channels and assured returns,” The Observer Research Foundation’s Powell said. She also says government guarantees add to the allure for foreign investors in the sector.

But while India’s renewable energy capacity is growing, registering a 50 percent increase over the past year, according to consultancy firm Bridge to India, analysts say more needs to be done. This includes integrating the additional power supply into the existing national grid, building large-scale battery storage facilities, and making rates competitive for businesses.

Gurpreet Chugh, managing director at ICF India, a global consulting firm, told Al Jazeera that while relatively cleaner fuel options are available, “the infrastructure required to deliver them to where they’re needed is simply missing”.

Though the price of solar and wind-generated electricity has fallen significantly (as key components like solar panels have become cheaper), these benefits have not been translated into greener industries.

One reason is that electricity distribution companies have been “reluctant” to implement systems that allow consumers to sell excess power they generate back to the grid, which could help expand the adoption of solar rooftop panels, Chugh explained.

Even if India misses its 2022 renewable energy targets, analysts remain optimistic for the future.

The Modi-led government has previously signalled that clean energy is a core policy focus, recognising its potential for job creation and technology transfer.

But as India looks to promote greater usage of renewable energy and electric vehicles, Ganesan warns that it “must not let battery imports cripple its finances the way oil imports have over the last few decades”.

Source: Al Jazeera