THE whole world, India included, will have breathed easier following the announcement that the United States and Iran have come close to an initial agreement. Hopefully, that should extend the ceasefire and open the Strait of Hormuz for shipping. No details are available at the time of writing, and one cannot be certain that there won’t be more blips on the way to a deal — or deals, since a preliminary one is likely to need follow-up agreements with difficult details. So, the release of tension is probably accompanied by people also holding their breath!
Sunday’s announcement should help to lower the prices of oil, gas and other critical commodities like urea. But even if a deal is actually reached, it will take months for the situation to return to the pre-war normal. Still, the world economy will have avoided the sharp slowdown that seemed a real prospect last week. India, hugely dependent on the imports of both oil and gas, as well as urea and other commodities produced in the Gulf area, will be particularly relieved.
The country has had a crisis-prone history associated with oil price shocks, one that is worth a brief recount in order to underline the need to avoid repeating that history. For, every oil price spurt so far has led to an economic crisis that in turn has provoked political change. This was true of the first oil shock of 1973 which quadrupled oil prices almost overnight, from $3 per barrel to $12. Inflation soared to 30 per cent, and the Opposition was able to force Indira Gandhi on to the back foot. The chain of events led to India’s only experience with dictatorial “Emergency” rule.
The second oil shock, in 1979, saw oil prices double to $23.50 per barrel, with prices in the spot market surging to $40. India’s shell-shocked economy shrank by an unprecedented 5 per cent. The government fell, and Mrs Gandhi returned to power. The third oil shock, caused by Saddam Hussein’s invasion of Kuwait in 1990, was less severe and lasted barely six months, yet it provoked a foreign exchange crisis. That triggered a positive outcome: widespread economic reforms by (you guessed it) a new government.
Finally, the oil shock of 2012 saw oil prices reach $125 per barrel and stay above $100 till 2014. That led to a surging current account deficit, and the rupee getting famously grouped with the “Fragile Five”. That more or less sank an already embattled Manmohan Singh government, and (along with other factors) helped bring Narendra Modi to power. His government began on a lucky note. Oil prices halved to $50 by 2015 and fell further to an average of $44 per barrel in 2016. That boosted economic growth to over 8 per cent for a couple of years.
It is this historical vulnerability to oil shocks that caused the US-Iran war to provoke worries among Indian consumers and policy-makers, not just about oil prices (up 50 per cent and more) but also about the assured supply of gas and urea. The grim prospect was of higher inflation, lower growth, a higher current account deficit and a bigger fiscal deficit. Those four horsemen may still show up, but it won’t be the crisis that some had feared.
The averted crisis should provoke thought about the steps required to insulate the economy from external shocks. Past attempts have focused on finding domestic oil and gas, with very modest results; import dependence has increased to 90 per cent for oil and about 50 per cent for gas. Now, for the first time in our history, solar and wind energy offer an alternative solution, not just because of their enormous generation potential, but also because they are now competitive when compared to new coal-based power plants. Indeed, solar energy may be competitive even after considering storage costs, thereby reducing the need for back-up power.
Renewable energy generation has already grown by leaps and bounds, and now accounts for about a quarter of electricity generation. The ambitious target is to raise that share to 50 per cent by 2030. Even that should be only a mid-term goal, for non-fossil-based electrification has the potential to grow even further.
In broad terms, India should aim to become an electro-state. The railways have already electrified virtually all their traction. But the electrification of road transport (though competitive, compared to petrol and diesel) has made slow progress compared to other countries, with relatively few public charging stations installed. Domestic cooking should be electrified too, reversing the push for gas-based cooking.
Many industrial processes that currently rely on hydrocarbons could also switch to electricity, as China has done on a massive scale. The need for oil and gas will not disappear, but the dependence can be reduced by enough to make the economy resilient to West Asian tremors.
Such a drive is likely to have much greater potential, and meet with greater success, than the government’s renewed stress on coal. For instance, coal-based fertiliser plants have been tried in the past, didn’t do well and had to be shut down. And coal gasification, another policy thrust, will require massive quantities of water at a time when the country is already water-stressed.
A renewable energy drive will have a critical impact on India’s external balances. The country’s large and growing deficit in trade in goods (a massive 8 per cent of GDP in 2025-26) has been covered for the most part by the surplus on trade in services (5 per cent of GDP). The composite trade deficit of 3 per cent of GDP is almost entirely on account of oil and gas, and would more or less disappear if their imports could be sharply reduced.
The country would then be less dependent on capital inflows, which so far have been a reliable feature and helped to double foreign exchange reserves over the past decade to some $730 billion at peak. But foreign portfolio investors, once enthusiastic about the Indian stock market, have pulled out as much as $45 billion in the last 18 months, while net foreign direct investment has shrunk dramatically. The rupee reflects this external weakness, even as the Reserve Bank’s foreign exchange reserves have fallen by $40 billion to $688 billion.
The currency weakness has further affected India’s appeal to foreign investors. India needs to be made a more attractive destination. A more hydrocarbon-proof economy will take the country a big step to that goal.
