Economic Project Report

National Institute of Securities Markets

A Project report on Macroeconomic Impact on Import of Oil in India and its relation with Exchange Rate

Under the guidance of Dr. Poonam Mehra.

Batch : PGPSM (2014-2015)

Team Members: (Group No 2)

1) YADNESH SHINDE (62)2) MANISH KUMAR SINGH (25)3) MAYUR TODANKAR (27)4) ADITYA KUMAR PANDEY (2)5) ATUL BACHHAVATE (10)


Objective of the Project:

Crude oil and its allied products are hot commodities in term of demand supply all over the globe. Its importance is more as it classified as a conventional rapidly depleting energy resource. Although in recent years there is significant development in technology to use no conventional energy resources, these are not fully commercialised due to their own pros and cons. Crude oil is explored by very limited countries in the world and have relatively high impact on global economy if something goes deflective in policy and nature of these counties. India has gone various supply and demand trends of oil import with Oil exporting countries from independence. Important thing is India have gradually seen its Import bill rising from start. So the question is “This rise in Import expense, is a result of consequent rise in demand or also there are some other parameters functioning to raise it, such as Exchange rates?” It has impacted India’s Current Account deficit very heavily. Here in this study we will be trying to understand & for its precise observation division of data & its decade wise analysis is considered.

Macroeconomic conditions brief overview on import of Oil (1980-2013):

Above illustration talks about how happenings around the globe have impacted oil prices over the last decades. There are majorly gulf countries who do oil export to world and by above pictorial representation they have gone under multiple war kind of experiences driving changes in oil prices.

Further we will illustrate the same in decade wise data of India’s Imports with corresponding Exchange rates variation:


Period one: Year 1971 to 1980:

The 1973 oil crisis started in October 1973 when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo. By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12.The oil crisis, or "shock", caused many global short-term and long-term economic and political effects.

Analysis of data on oil Import by India and corresponding change in Exchange rate for 1970 to 80:

1970-71

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

1977-78

1978-79

1979-80

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Imort by India 1970-1980

Rs in

Bn

1970-71

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

1977-78

1978-79

1979-80

0.00001.00002.00003.00004.00005.00006.00007.00008.00009.0000

10.0000

Exchange Rate (Rs/$) in 1970-1980

Rs /

$


Oil price(Bn

Rs)%93%

Exchange rate%7%

% of ER and Oil price in total Import bill Paid (1970-1980)

Findings of graph:

Graph 1: The details of raising Import bill from 1973 due to Oil crisis of OPEC Countries.

Graph 2: The Exchange rate in terms of Rs/$ is almost steady with slight rise at end.

Graph 3: Although Exchange Rate (ER) is steady, still there is 7% of bill amount by ER.

Period Two: 1981 to 1990:

During the 1980s, non-OPEC production increased worldwide. By 1980 the Soviet Union was the world's largest producer of oil.

From 1980 to 1986, OPEC decreased oil production several times and nearly in half to maintain oil's high prices. However, it failed to hold on to its preeminent position, and by 1981, its production was surpassed by Non-OPEC countries. OPEC had seen its share of the world market drop to less than a third in 1985, from nearly half during the 1970s.In February 1982, the Boston Globe reported that OPEC's production, which had previously peaked in 1977, was at its lowest level since 1969. Non-OPEC nations were at that time supplying most of the West's imports.

OPEC's membership began to have divided opinions over what actions to take. In September 1985, Saudi Arabia tried to gain market share by increasing production, creating a "huge surplus that angered many of their colleagues in OPEC". High-cost oil production facilities became less or even not profitable.

OPEC had relied on the price elasticity of demand of oil to maintain high consumption, but underestimated the extent to which other sources of supply would become profitable as prices increased. Electricity generation from nuclear power and natural gas; home heating from natural gas; and ethanol blended gasoline all reduced the demand for oil. New passenger car fuel economy rose from 17 mpg in 1978 to more than 22 mpg in 1982, an increase of more than 30 percent.



1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Indian oil Import Cost 1981-1990

Rs in

Bn

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

0.00002.00004.00006.00008.0000

10.000012.000014.000016.000018.0000

Exchange Rate (1981-90)

Rs/$


Oil price(Bn Rs)%45%Exchange rate%

55%

% of ER and Oil price(1981-1990)

Findings of graph:

Graph 1: As explained the reasoning of OPEC’s mismanagement of economic oil policy of oil production, wrong assumption of price elasticity of Oil and consequent opportunity taken by USSR in 1986 explaining reduced Import bill of the India in this decade.

Graph 2: The Exchange rate in terms of Rs/$ is almost doubled in this decade causing neutralising advantage of price reduction.

Graph 3: Here Exchange Rate (ER) is increasing sharp, resulting 55% of bill amount constituents by ER.

Period 3: 1991 to 2000:

East Asian Crisis:

The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96, and then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern

Newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise.

The Asian Financial Crisis which began in 1997 was a period of financial crisis that affected much of Asia raising fears of a worldwide economic meltdown due to financial contagion. The crisis started in Thailand on July 2, 1997 with the devaluation of Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the United States dollar, after being unsuccessful in an attempt to support it in the face of a severe financial overextension that was in part real estate


driven. Prior to the crisis, Thailand economy was in the glimpse of collapse as it had acquired a burden of foreign debt. The crisis spread to other Southeast Asia countries (Philippine, Malaysian, Indonesian, Singapore, South Korea, Hong Kong and Taiwan) and Japan with their currencies slumping, stock markets collapsing and other asset prices declining, and a precipitous rise in private debt. The Asian crisis made international investors reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The economic slowdowns affected the demand for oil reducing the price of oil, to as low as $8 per barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters. This reduction in oil revenue led to the 1998 Russian financial crisis, which in turn caused Long-Term Capital Management in the United States to collapse after losing $4.6 billion in 4 months (Wikipedia, 2009).


1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

0.00

100.00

200.00

300.00

400.00

500.00

600.00

Indian Oil Import 1991-2000

Rs in

Bn


1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

0.00005.0000

10.000015.000020.000025.000030.000035.000040.000045.000050.0000

Exchange rate (1991 - 2000)

Series1

Rs/$

Exchange Rate 1991 - 2000

Oil price(Bn Rs)%17%

Exchange rate%83%


Findings of graph:

Graph 1: In this decade 1997 to 1999 shows the effect of Asian Financial crisis, showing reduction in Price for two years, but overall performance was in the raising trend.

Graph 2: The Exchange rate in terms of Rs/$ has again risen double in a decade.



Period 4: 2001-2013:

2003 STRIKE: Venezuelan unrest and the second Persian Gulf War. A general strikeeliminated 2.1 mb/d of oil production from Venezuela in December of 2002 and Januaryof 2003. This was followed shortly after by the U.S. attack on Iraq, which removed anadditional 2.2 mb/d over April to July

2007-2008: Growing demand and stagnant supply. Global economic growth in 2004 and 2005 was quite impressive; with the IMF estimating that real gross world product grew at an average annual rate of 4.7%. World oil consumption grew 5 mb/d over this period, or 3% per year. These strong demand pressures were the key reason for the steady increase in the price of oil over this period, though there was initially enough excess capacity to keep production growing along with demand.Whatever the cause, the oil price spike of 2007-2008 was by some measures the biggest in post war experience, and the U.S. recession that began in December of 2007 was likewise the worst in post war experience, though of course the financial crisis rather than any oil-related disruptions were the leading contributing factor in that downturn.


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0.001000.002000.003000.004000.005000.006000.007000.008000.009000.00

10000.00

Indian Oil Import 2000-2013

Rs in

Bn


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0.0000

10.0000

20.0000

30.0000

40.0000

50.0000

60.0000

Exchange rate 2000-2013Rs

/$

Oil price(Bn Rs)%14%

Exchange rate%86%


Findings of graph:

Graph 1: Very volatile years with lots of occurrences impacting oil trade. We can see here the financial crisis impact in 2007 – 2009 yrs.

Graph 2: The Exchange rate in terms of Rs/$ is almost steady with slight rise at end.


Conclusion:

Based on the data, graph and its analysis we can observe the exchange rate has huge impact on the Import bill of the country. It’s is taking our huge amount of $ reserve out of the country, depreciating rupee against dollar. This is showing increasing trend & surely a reason to worry. Government should take steps on this to reduce impact of Exchange rate on oil Import.

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