The Nation Responds
Just about four months after the OPEC oil shock, the Oil and Natural Gas Corporation (ONGC), a state-controlled enterprise, had discovered the Bombay High oilfield, which turned out to be the biggest discovery in India. The OPEC decided to enforce its embargo on oil supplies to the US on 19 October 1973 and raise prices of crude oil. On 19 February 1974, oil was struck in Bombay High, about 160 kilometres from the shores of Mumbai and the depth of water at the drilling locations ranged between 75 and 90 metres. The Bombay High structure was delineated with the help of a Russian exploration ship Academic Arkhangelsk, while the first well was drilled by an acquired jack-up rig, Sagar Samrat.3 The role of Bombay High in managing the disruption caused by the OPEC decision to jack up oil prices could hardly be overestimated. There is little doubt that the urgency of ONGC stepping up efforts to explore and produce more oil from domestic sources was triggered largely by the oil shock of October 1973. In the ten years after the Bombay High oil discovery in February 1974, India’s total crude oil production rose from 7 million tonnes to 28 million tonnes in 1983–84.
The only companies producing crude oil in undivided India, before India’s Independence in 1947, were the Assam Oil Company in the north-east and Attock Oil Company in the north-west. Many international experts had given India up as a region whose sedimentary basins could bear any oil or other mineral resources. But efforts were stepped up to develop hydrocarbon resources soon after India’s Independence. The Industrial Policy Statement of 1948 had underlined the need for developing the hydrocarbons industry, but allowed private companies to operate in oil exploration and production. The Assam Oil Company continued to produce oil at Digboi in Assam and Oil India Limited, a joint venture between the Indian government and Burmah Oil Company, had opened two fields in Assam. Another joint venture between the Indian government and Standard Vacuum Oil Company of the US was engaged in exploration work in West Bengal.
In 1955, the government decided to develop oil and natural gas resources in different parts of the country as state-sector projects. This was a year before the Indian government unveiled its Industrial Policy Resolution that reserved many industries for the state sector, including oil exploration and production. Thus, the Oil and Natural Gas Directorate was set up in 1955, which kicked off India’s indigenous efforts at developing a robust oil and gas sector. The focus was more on scientific research to discover oil and gas, and the directorate hired a good number of geoscientists from the Geological Survey of India. A delegation, led by the then minister of natural resources, K.D. Malviya, visited several countries to study and understand the oil industry there so that adequate training to Indian professionals be imparted to give the domestic industry a kick-start. Foreign experts from the US, West Germany (West and East Germany were two separate countries at the time), Romania and the erstwhile Union of Soviet Socialist Republics (USSR) visited India to discuss ways to help India’s nascent oil industry.
At the end of those consultations, the Nehru government opted for the plan for geological surveys and drilling operations submitted by the Soviet Union and incorporated it in the Second Five-Year Plan, which began in 1956–57 and ended in 1960–61. The choice of the Soviet Union as partners in India’s oil industry development was also indicative of the country’s political tilt that had become evident by then. It was a tilt that was also a political necessity. The attempts of Malviya and Nehru to develop the oil and gas sector in India did not receive much support from Western countries; the only country that extended its helping hand was the Soviet Union, which agreed to train Indian scientists and engineers in addition to sending experts and equipment to India on soft rupee-payment terms. The USSR also helped India set up two state-of-the-art research and development institutes for petroleum exploration and drilling technology, which built indigenous capacity to undertake oil exploration and drilling. Indeed, ONGC’s discoveries in Gujarat, Assam and Bombay High were largely possible because of the support India got from the Soviet Union.4
The irony of this association with the Soviet Union was that it came under stress as India grew its domestic crude oil production and embarked on new fields, including those in offshore blocks. Subsequent efforts by ONGC to explore oil and gas in other blocks in the Arabian Sea and also in the Krishna Godavari Basin in the Bay of Bengal were made with the help of technology provided by Western countries.
The Soviet Union was not thrilled with Western countries helping ONGC in India’s offshore exploration efforts. It felt marginalized even as a few rounds of exploration contracts were awarded to companies from the West. This was largely because the Soviet Union did not have technology as advanced as the Western companies had for offshore exploration. To salvage the situation, an Indo-Soviet cooperation agreement in the oil exploration sector was signed and many onshore sites were handed over for exploration in collaboration with the USSR. Such efforts, though, did not bear much fruit, and in any case, the collaboration almost fell apart as the USSR disintegrated into many different countries and India embraced market-based reforms and also moved closer to the United States in the early 1990s.
The launch of the ambitious Second Five-Year Plan, on the other hand, laid the foundation in the country for a strong oil and gas sector, capable of reducing the dependence on crude oil imports and insulating the Indian economy against sharp fluctuations in international crude oil prices. Thus, the Nehru government quickly recognized that the structure of a directorate was not adequate for the kind of rapid development that was required in the oil sector. In August 1956, the Oil and Natural Gas Directorate was converted into a commission, with enhanced powers to access finance and technology. Renamed as the Oil and Natural Gas Commission, it was made into a statutory body with the enactment of a law by Parliament in October 1959. ONGC was now mandated by law to ‘plan, promote, organise and implement programmes for development of petroleum resources and the production and sale of petroleum and petroleum products produced by it’. ONGC found new resources in Assam and established new oil exploration areas in the Cambay basin in Gujarat. And finally, its offshore explorations that began in the early 1970s gave quick results and oil was discovered in Bombay High in February 1974. The rapid rise in the importance of the ONGC is certainly one of the many outcomes of the OPEC decision to hike oil prices.
It is worth noting that Indian geologists working towards improving the domestic availability of crude oil played a crucial role. As Vijay L. Kelkar, an economist with a long stint with the government and a vast experience of having dealt with India’s oil sector, points out, every drop of oil was discovered in India, thanks to the hard work put in by Indian geologists associated with different government departments and organizations.5 Kelkar also believed that India’s march towards developing domestic oil resources would have been rapid if only the country’s politics surrounding Assam had not played a spoilsport. The problems around resource nationalism came in the way of faster development and commercial exploitation of oil and gas in that region.
An Enduring Disruption
The OPEC decision in October 1973 fundamentally changed the way India’s macroeconomic policies were to be framed in the coming decades. This is one disruption whose impact continues to influence economic policies in India. Two factors are responsible for this.
One, the OPEC oil shock of 1973 was not an isolated or solitary event. It cut production many more times in the 1970s, and repeated as also carried out these threats on several occasions in subsequent decades. Apart from the 1973 decision, oil prices were raised again in 1979 in the wake of the Iranian revolution as Iran cut oil production drastically. Global oil production fell by about 10 per cent and oil prices jumped to $35 a barrel. Between 1980 and 1986, there was a lull in oil prices as the global economy slowed, depressing demand for petroleum products, and conservation efforts picked up reining in consumption levels across the developed world in particular.
The sense of relief from the fall in crude oil prices disappeared in 1990
and again by the turn of the century. In 1990, crude oil prices crossed the $23 mark in the wake of the Gulf War, with Iraq invading Kuwait. Once that crisis was over, oil prices settled down at lower levels and by 1998 they were down to about $12 a barrel. But they started rising again by the turn of the century and reached a high of $97 a barrel by 2008. The global financial crisis of 2008 saw the oil prices soften a bit, but again they rose to $111 a barrel by 2012.
The volatility in international crude oil prices continues unabated, though at a price range of $70–80 a barrel it seems to be at a point where OPEC sees the price stabilizing; any price higher than this makes the alternative development of shale oil (hydrocarbons extracted from types of sedimentary rock) look attractive and can pull down the prices. It is this volatility and the assessment that crude oil prices can shoot up any time that has made countries like India permanently vulnerable to disruptions and forced them to frame policies that could absorb such shocks.
The second issue that makes international crude oil prices such an important factor for India’s economic policies is the country’s continued dependence on imports. In spite of the progress made by ONGC in the 1970s by striking oil in Bombay High, and a few other discoveries by ONGC and other enterprises in different basins—both offshore and onshore—during the subsequent decades, India’s domestic crude oil production is woefully short of its rapidly growing demand for domestic consumption.
Till 1990–91, India still managed to produce more crude oil at home than its total imports— crude oil production was estimated at 33 million tonnes, compared to imports of 22 million tonnes. Higher growth after the economic reforms of 1991–92 saw India’s demand for crude oil rise at a rapid pace even as its domestic crude oil production plateaued. Crude oil production from Indian wells rose to a high of 38 million tonnes by 2010–11 before dipping to 36 million tonnes in 2017–18. In contrast, import of crude oil skyrocketed to 164 million tonnes in 2010–11, and further up to 220 million tonnes in 2017–18. It is ironical that while the OPEC price hike of 1973 was a positive trigger for a rise in domestic crude oil production in the 1970s and the 1980s, the same did not hold true for the subsequent decades. Policy failure on boosting exploration activities in subsequent decades has proved to be costly for India. Attempts were made to invite domestic as well as foreign players to undertake the exploration of oil as well as natural gas in Indian geological reserves. But success was limited with only a handful of private operators striking oil and gas. Even those few discoveries were mired in controversies, and subsequent policies, even though they were liberalized and made more attractive with higher incentives, failed to make much headway in promoting domestic oil and gas exploration and production. This only increased India’s dependence on imports of crude oil and gas—a dependence that continues to worry the country’s energy experts and planners.
India’s trade policies, too, were impacted by the OPEC developments. Oil has remained the permanent spoilsport in India’s foreign trade performance. With the cost of oil imports going up, petroleum products, including crude oil, continued to account for the largest chunk in India’s import basket. India’s exports were never enough to take care of the country’s oil imports. The problems of a widening trade deficit got worse after the crude oil price increased in 1973. Take out oil trade—both exports and imports of crude oil and petroleum products—and India’s foreign trade performance for many years in the wake of the OPEC decision of 1973 showed that the overall trade deficit remained marginal in the first three decades after the oil shock. Indeed, in as many as eighteen years between 1970–71 and 2003–04, non-oil trade for India has seen a surplus. The oil factor, therefore, definitely cast its long shadow on India’s trade policy, biasing it more towards imposing controls on overall imports to reduce the impact of the rising oil trade deficit on the balance of trade. If policies towards exports promotion did not have too many takers in the government of the 1970s and the 1980s, oil prices certainly were responsible to a great extent. A trade policy shift aimed at promoting exports did take place in the 1990s, but the Indian economy had been set back by at least two decades.
The government’s finances too took a hit on account of the OPEC-led oil price disruption. Initially, after the increase in the price of imported crude oil and petroleum products, the Indian government decided to absorb a part of the additional burden on its finances and passed on only a part of the higher costs to the consumers. The government’s pre-Budget Economic Survey for 1973–74, tabled in Parliament in February 1974, summed up its approach to retail pricing of petroleum products in the wake of the crude oil shock in these words:6
Mineral oils offer a prime example whereby higher import costs can upset the domestic price structure. Up to October 1973, the pricing policy for petroleum products was so designed as to raise prices to the extent warranted by changes in the price of crude, while at the same time, insulating, to the maximum extent possible, a mass consumption item like kerosene and important inputs like naphtha for fertilisers and diesel oil for transport (including agricultural tractors). Anticipating further increase in the price of crude oil and the need to moderate the growth of consumption of petroleum products, the excise duties on motor spirit and kerosene were raised in November 1973 so as to restrict consumption. However, no increase was effected in the price of naphtha and the price of HSD was brought down slightly to bring it into parity with that of kerosene.
Thus, there was no government attempt to soften the impact of higher crude oil prices on retail prices of petrol and other petroleum products. The government, however, did try to reduce the prices of kerosene, naphtha and diesel, but overall, the principle of pass-through of higher crude oil prices was followed. This fuelled inflation and contributed to popular resentment and unrest—developments that the opposition political parties used effectively to mount a united challenge against the Indira Gandhi government in 1975. What, therefore, cannot be ruled out is the causal connection between rising petroleum product prices contributing to higher inflation and Indira Gandhi’s response to the opposition political parties’ challenge to her government by declaring a state of internal emergency in 1975.
But as the crude oil prices began declining from 1980, the government decided to introduce an Oil Pool Account system. This account was maintained by the government. The surplus of the oil companies as a result of the falling crude oil prices was deposited in the Oil Pool Account. The objective was to use the Oil Pool Account resources to reimburse the oil companies when crude oil prices rose, putting pressure on their finances. This became necessary as the government had kept retail prices of petroleum products under an administered pricing mechanism (APM). With reforms underway, the APM for the oil sector was dismantled from 2002–03, and the government’s subsidy provisions for the oil sector became even more explicit. With rising oil prices and the government’s failure to pass on the entire increase in international crude oil prices to consumers, the burden of petroleum subsidies kept rising—from Rs 6265 crore in 2002–03 to Rs 38,371 crore in 2010–11. With the decision to link prices of petrol and diesel to the international market in phases from June 2010, the overall petroleum subsidy burden was kept under check and was estimated at only Rs 24,480 crore in 2017–18. It was clear that the pattern of international crude oil prices had continued to affect the government’s finances even after almost three decades of economic reforms.
There was also an indirect positive fallout of the OPEC oil shock of 1973 for the Indian economy. With the West Asian economies benefitting from higher price realization from their oil, there was a spurt in construction activities in that region. Indians and Indian companies were quick to exploit this as an opportunity. Several Indian companies explored project exports as a way to earn foreign exchange from the oil-rich countries in West Asia. While this boosted the country’s export earnings, there was an added benefit by way of rising remittances that Indians working in West Asia began sending back home. From $430 million of remittances in 1975, India
’s remittance income rose to $642 million in 1976 and further to $2.7 billion by 1980. The remittances saw a bigger increase from 1991 onwards, when India relaxed its exchange control rules by which dollar remittances could realize higher rupee earnings. Economic reforms and more Indian companies and Indians spreading their networks across the world boosted remittances, which eventually made India the world’s number one country, receiving close to $70 billion by 2017. But the OPEC oil price increase of 1973 was the first trigger for India’s gains from dollar remittances.
The disrupter for India in its oil economy was not an Indian entity. It was a combination of factors, whose roots lay in foreign lands. US President Richard Nixon deciding to take his country’s currency off the gold standard and supporting Israel in its defence against attack from Syria and Egypt were the key factors that led to the OPEC response by way of increased oil prices. For India, the impact of the disruption was a mixed bag. While it contributed to the country’s resolve to undertake more rigorous and extensive oil exploration and production to reduce its dependence on imported oil, the higher oil prices also had an adverse impact on government finances and balance of payments. No other external disruption has had such a long-lasting influence on Indian economic policies, particularly with regard to public finance.
Section 7
The Emergency
CHAPTER 12
TOPPLED IN COURT
For three separate reasons, not entirely unconnected with each other, 12 June 1975 was an important day for Prime Minister Indira Gandhi. Early in the morning, she received the news that D.P. Dhar, her adviser and trusted lieutenant for years, had died of a massive heart attack. Dhar at that time was India’s ambassador to the Soviet Union. He had just been sent to Moscow for his second stint after he served the Gandhi government in different capacities including as a minister. He played a key role in India’s war with Pakistan that led to the secession of East Pakistan, which eventually led to the creation of Bangladesh. He also played a crucial role in the formulation of India’s friendship treaties with both Bangladesh and the Soviet Union.
The Rise of Goliath Page 15