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JUN 20 2012

How power shortage affects Indias current account deficit

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 20th JUN 2012

Has oil import growth really moderated? On the face of it, the answer is yes. After all, in fiscal 2012 (FY12), Indias crude oil imports jumped nearly 40% to $140 billion (around Rs.7.83 trillion today). In comparison, oil imports in May rose just 14%, as the recent commerce ministry data shows.

But that does not entirely present a true picture. In FY12, volumes rose only 4.7%, which means that the rest of the rise in the oil import bill could be attributed to the increase in crude prices. Economic growth, at least in the early part of the year, was hovering around 7.5%.

Cut to May this year, crude oil prices have fallen by 10% from a year ago, which suggests that volumes are up. Gross domestic product growth in the March quarter came in at 5.3%, the lowest in a decade, and economic indicators such as the Index of Industrial Production for April signal that things arent getting better. That should have led to even lower oil imports.

One reason for the continuing rise in the oil import bill is, of course, the governments reluctance to raise domestic diesel prices. That has not only kept diesel demand robust, but also encouraged the switch from petrol to diesel vehicles.

Yet another area that could be responsible for the spurt in oil consumption is the rising use of diesel, especially for powering diesel generator sets. Although the power deficit has improved slightly at the all-India level over the past couple of years, there are certain regions such as south India that are reeling under power cuts. Most of the new generation capacities have come up in the north and the west, and the three of the four southern states, except Kerala, have power deficits in double digits.

Therefore, it would suggest that many industrial and commercial consumers of electricity would have used diesel generators to power their factories and offices. Indeed, a look at the March quarter sales of Cummins India Ltd, a genset maker, shows that volumes in the south almost equalled the combined numbers of the north and the west.

The petroleum planning and analysis cell in its April review suggests that the power deficit is one reason for the spurt in diesel sales. For example, the report states, "Tamil Nadu recorded very high (sales) growth of 28.3% in HSD (high-speed diesel) in April, which can partly be attributed to high power deficit.

For a moment, forget individual consumers for whom this switch is costlypower from diesel gensets costs almost three to four times what could be purchased from distribution companies. In a country that depends on coal for generating two-thirds of its electricity, switching to crude oil is costly indeed. Back of the envelope calculations show that a dollar of the typical grade of coal Indian companies import yields four times as much energy as a dollars worth of crude oil.

But the infrastructure index shows growth in coal production was -0.20% in 2010-11, and 1.2% in 2011-12. The problem with coal productionlargely due to faulty policytherefore lies at the heart of the increased demand for diesel. This, of course, leads to higher imports of coal and diesel, thus affecting the countrys balance of trade.


Tamil Nadu Kerala Indus

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