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Indian Elections Cannot Disguise Economic Worries

India’s general election has taken place in seven phases over the last several weeks, making it the biggest exercise in democracy in history.

Exit polls suggest that the ruling Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, and its coalition partner the National Democratic Alliance (NDA) will win a clear majority when official results are announced on 23rd May. The historical performance of exit polls has been patchy, largely because the size of the electorate and the contrast of state versus national issues are difficult to capture in small samples. Still, most observers suggest that Mr Modi will get another term even as the Indian economy has softened in 2019 so far. In that respect, India only reflects the general global situation.

The global investor community has responded positively to the exit polls, perceiving (however well informed or not) that Mr Modi has the most business-friendly policies. But there are some signs that India faces some economic headwinds. One of these comes from the Indian Oil Ministry’s Petroleum Planning and Analysis Cell (PPAC), which has just released a forecast of the Indian oil markets for 2019 and 2020.

The report shows how Indian domestic crude oil production has stagnated at around 35 Million Tonnes (Mn T) a year for the last decade, reaching 35.7 Mn T in 2018 but projected to fall to 34.2 Mn T in 2019. Import dependency, which has grown in each of the five years of the Modi administration, is likely to continue to grow, from 82.9% in 2018 to an estimated 83.7% this year. However, the PPAC forecasts crude oil imports rising to 233 Mn T in calendar 2020 compared to 227 Mn T this year – an increase of just 6 Mn T or 2.6%.

The data suggest slower growth in domestic refinery output and possibly slower growth in domestic oil products consumption. The PPAC analysis forecasts that oil products imports will fall by over 8% to 32.5 Mn T in 2019 compared to 35.5 Mn T in 2018. Are Indian refineries supplying more domestic demand than previously? Perhaps, but the PPAC analysis suggests that petroleum product exports will fall to 61.1 Mn T in 2019 from a high of 66.8 Mn T in 2018. With surplus refining capacity, India is a net exporter of petroleum products. But with international markets also witnessing a slowdown, product exports have been hit, says the PPAC.

The PPAC has created its base case for imports around an average oil price of USD 66 per barrel, so high crude prices are not the culprit for its forecasts. An anonymous member of the PPAC told the Economic Times newspaper, “While lower oil import growth cuts India's oil import bill and helps it manage the current account deficit, this would be a factor of prevailing oil prices. If crude prices jump following tension in the Gulf, a cut in supplies from Iran and Venezuela and production slowdown by OPEC countries, it could add further pressure to a slowing economy.”

India, along with China, has been the leading growth importer of energy in recent years, providing most of the demand growth for the crude oil tanker markets. The Indian refining industry was a key foreign currency earner for several years. But now it looks like Indian refiners are facing increasing competition for their key European export markets from other refiners east of Suez as well as from the US. If a domestic Indian economic slowdown does occur, the refiners will be sitting on considerable surplus capacity. In such a case, the government’s Hydrocarbon Exploration Licensing Policy, which aims to support more domestic exploration and production, may come up short.

The Take Away

Oil tanker markets need nations like India to drive hydrocarbon consumption. With anywhere up to 75 VLCCs expected to deliver this year (depending on delays to delivery schedules), the crude oil tanker market needs a demand-side boost. Tensions in the Middle East are not, as some hope, the answer to tanker market prayers. As the PPAC reports, consequent rising oil prices would cut demand in India and probably globally. A spike in oil prices based on widening conflict in the Middle East would push up inflation in the OECD nations and key emerging markets like India and China, forcing central banks to raise interest rates and possibly driving weak growth mature economies into recession. More than ever, we need calm heads and resolute diplomacy in that part of the world.

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