India’s Rising Energy Bill and CAD

The current account deficit of India for FY '23 is expected to register a steep rise. A high import bill and fall in exports are compounding policymakers' problems. Monetary policy throughout the world is understandably focussed to contain inflation.

Indian ports registered buoyant demand for crude oil and imported coal in the first quarter of current financial year (FY). Private ports moved a major chunk of the crude oil, accounting for 41 mt of crude traffic during first quarter. Crude and coal consumption are driven by domestic demand, while demand for container volume is driven by demand. 

Since the start of Russia – Ukraine war in late February, India has ramped up the purchase of Russian oil. Incidentally, India’s crude oil purchase from UAE has come down drastically, while purchases from Saudi Arabia and Iraq have remained range bound. After placing sanctions on Russia, major European countries have started to purchase more oil from the Middle East region.

Shortage of domestic coal has forced power generating companies to opt for expensive imported coal. To ensure sufficient stocks at power plants, the government of India diverted domestic coal production to strategically important sectors.

“China and India continue to haul in Russian crude from the seaborne market, with India likely to pass China to be the top importer in July. This is the first time Indian imports of seaborne Russian crude have exceeded those from China,” said Emma Li, China analyst for Vortexa.

The bulk of Russian crude oil purchased by India makes its way through the Black Sea. Heavy discounts offered by Russia has made it feasible to import crude oil through the much longer sea route in the far east.

Rising Current Account Deficit

The import bill for India is rising due to several factors. The deprecation of the Rupee against the US Dollar and the rise in crude oil prices are the primary factors for the expansion of the current account deficit (CAD). If things continue to rise at the current rate, India may register a decade-high CAD in the current FY.

Commerce and Industry Minister, Piyush Goyal, while answering MP’s questions in the Lok Sabha, said that “As per the feedback received from the industry, exports of some products from India are affected such as pharmaceuticals, telecom instruments, tea, coffee, marine products.”

While shedding light on India - Russia trade, Mr. Goyal added, “The bilateral trade with Russia has, however, improved in comparison to the corresponding period last year.”

The Reserve Bank of India (RBI) is letting the Rupee slide for the time being as any unilateral action from RBI may do more harm than good. A high inflation rate that has not been seen in decades is prompting policy action from central banks across the world. It will be interesting to see for how long policymakers can stay behind the curve.