1. As India integrates into a seamless world, it cannotremain impervious to developments abroad. Theunfolding of the Euro zone crisis and uncertaintysurrounding the global economy have impacted theIndian economy causing drop in growth, highercurrent account deficit and declining capital inflows.Export growth has slowed down while importsremained high, partly because of continued highinternational oil prices. Due to the extensive macroimbalances and the recent outrage among generalpublic about the price hike of petrol made me choosethis topic. I would like to focus on the variousreasons for such a loss accumulated by the petroleumindustry which led to the such imbalances in theeconomy.

2. The main objective of my study is- To evaluate the loss suffered by thepetroleum industry due to euro crisisand thereby its impact on the Indianeconomy 3. The euro crisis was a period of time in whichseveral European countries faced the collapse offinancial institutions, high government debt andrapidly rising bond yield spreads in governmentsecurities. The European sovereign debt crisisstarted in 2008, with the collapse of Icelandsbanking system, and spread to primarily toGreece, Ireland and Portugal during 2009. Thedebt crisis led to a crisis of confidence forEuropean business and economies which hasfurther affected the Indian economy as Indiabeing structurally an import intensive countryimports nearly 83% of its oil requirement andconsume the largest part of the forex reserves. 4. The ongoing euro crisis has been one of themajor external reasons which has lead to thewide fluctuations in rupee exchange rate within ashort span of time. This has been unsettling andhas left its imprint on the entire economy. Thedepreciating rupee has added further pressure onthe overall domestically induced cost pushinflation. The rupee depreciation has particularlyhit the industrial sector and has put higherpressure on their costs as items like oil, importedcoal; metals and minerals, imported industrialintermediate products all have been affected 5. Euro crisis Decrease inIndustrial sector hitexports and hard due to foreign investment increase in prices from the eurozone. of petroleum, coal primary reason forand gas.weakening of INR Increasingpressure on existing inflation,increase in value of import. 6. 8074.4 73.7 71.8 72.570 69.9 70.367.764.3 64.3 64.5 65.562.1 6363.260 60.5 53.8 54.5 55.1 52.7 53.15049.3 47.6 45.4 45.4 45 44.4 45 44.8 44.4 45.540USD30Euro2010 0 7. The depreciation of rupee due to euro crisis can be seen becauseof the fall in FIIs(Foreign institutional investment). In the light ofuncertainty and fall in global stock market, foreign institutionalinvestors were pulling out their money from various EMEs(Emerging Market Economies) and were taking them back to theirhome countries in order The following trend line indicates the extremely erratic trendfollowed by the FIIs. This is due to the fall in industrial growthof India. The unimpressive growth of the Indian industrialsector does not attract large amounts of foreign investors.The industrial sector has been hit by the fall in demand fromthe Euro zone and also the depreciating INR has increased thecost of raw material which includes predominantly the cost ofpetroleum, coal and gas. to sustain themselves. 8. 15000 10652.910000 7196.1 50004883.3 Net FII EXCHANGE RATE 0 44.4 45 44.844.445.547.6 AprilMay JuneJuly Aug September -1865.7-4276 -5000 -7902.5-10000 9. Oil imports consume the largest part of the foreign exchangereserves. According to the recent studies by the National StatisticalSurvey Organisation it has been calculated that India imports about83% of its oil requirements the depreciating rupee is bound to offset the decrease in theinternational prices of the commodities such as oil. So, basically thevalue of Indian oil imports has risen. although the oil price perbarrel has fallen however the depreciating rupee has not given anyrespite to the importers as they actually have to shell out moremoney in order to purchase the same quantity of oil. It has been estimated that a Re. 1 fall in the value of the rupeeagainst the dollar means a loss of Rs. 8000 crores for oil marketingcompanies. The rupee has fallen by Rs 12 against the dollar sincelast year. 10. Taking the case of crude oil imports, the price of Brent crude oil imports inthe international markets was $ 118.46 per barrel in April 2011 whenexchange rate for the rupee was Rs. 44.4 to a dollar. In November, oil pricehad gone down to $109.03 barrel and exchange rate was Rs. 52.7 to adollar. Thus because of the rupee depreciation no benefit can be derivedout of the lower oil price. Instead, the increase in price of importing oilbetween April and November is to the tune of Rs. 489.8 per barrel. 11. The additional cost of importing crude oil due to weakeningrupee without a corresponding increase in the retail prices hasput a strain on the oil marketing companies. This can be seen bythe declining growth and receipts from quarter to quarter andincreasing expenditure. %GROWTH302022.146 18.63 16.39 14.810 0 %GROWTH Q-3(2010) Q-4(2010) Q-1(2011)Q-2(2011)Q-3(2011) Q-4(2011)Q-1(2012)-10 -12.202-17.55-20-30 -35.637-40 12. 40000. This negative growth rate andincreasing expenditure has led 35000to the accumulation of hugelosses. The state owned oil30000firms have lost around Rs. 250004300 crores on petrol sales inthe last six months. The share 20000 Receipts(inprices of the oil marketingcrores) 15000companies have declined 45-Expenditure(in crores)50%. For instance the Indian oil 10000corporations stock fell by 45%from Rs. 456 in September 50002010 to Rs. 247 in December02011. Hindustan petroleum(HPCL) fell by 55% and Bharatpetroleum (BPCL) stock hasfallen by 45%. 13. values of under The depreciating rupee and huge losses recoveries(crores) have led to the increasing accumulationof under recoveries by oil marketing200000 187127companies.180000The under recoveries are a notional160000measure representing the difference140000138541between the trade-parity cost of refined120000product paid by OMCs and their realised100000sales price.values of under 8000078000 recoveries(cror 60000es) 40000 20000 0 14. GROWTH RATE growth rate %200.8Q3 1.1 1.215 1.2Q4 1.6 2 2.42011Q1-1106.1 1.9Q22.11.8 5growth rate %1.3Q3 1 GROWTH RATE 1.10.40Q40.34.6 1.4 FEB AUGUSTFEBAUGUST FEB MAYMAY MAYNOV NOV2009 NOV2008Q1 2.4 2.3 -5 2.42007Q2 3.20-10-2.000.002.004.006.00 8.00The above graph shows the quarterly growth in GDP of the Indian economy from2007-08 Q2 to 2012Q4. As can be seen the euro crisis which started unfoldingsince 2007, has marked its effect on the growth of the Indian economy due to theslowdown in the industrial growth of the economy. The following figure shows thetrend of the growth of the industrial output since 2009-10 15. The a figure represents the increasing current account deficit with respect to theC.A.D WITH RESPECT TO GDP (%)GDP of India. The current account balance as a0 percent of GDP provides an 2007 2008 2009 2010 2011 2012 indication on the level of-0.5 international competitiveness of a -1country. As the current account deficit signifies a-1.5 countrys total imports of goods, services and -2 C.A.D WITH RESPECT TO transfers is greater than GDP (%) the countrys total export of goods, services and-2.5 transfers. This situation makes a country a net -3debtor to the rest of the world. In this case we can-3.5 see that due to the increase in the value of oil imports -4the current account deficit in India is increasing which has taken a hit on the Indian economys competitiveness. 16. government budget deficit (% of gdp)0 2006200720082009201020112012-1-2-3-3.1-3.3-3.5-4 government budget deficit (%-4.6 of gdp)-5-5.1-6-7-6.9-7.8-8-9 17. 400EXTERNAL DEBT (BILLION $) 350 300 250 200 EXTERNAL DEBT (BILLION $) 150 100500 20072008 2009 20102011 2012The rise in government debt points out the fact that the increasing burden of oil imports has taken a toll on thegovernment finances. This reduces the scope of public finances by the government as the finances will have to becurbed for oil imports for the purpose of industrial development. 18. BALANCE OF TRADE (BILLION $) 02006 20072008 2009 2010 2011 2012 -2 -4 -6BALANCE OF TRADE (BILLION $) -8-10-12-14 The balance of trade directly shows us the impact that increased value of oil imports has had on the Indian economy. The negative balance of trade of India tells us that Indian economy has to depend more and more on foreign investments and its foreign exchange reserves to avoid a balance of payment deficit. 19. Due to euro crises there has been a considerable decrease in the foreigninstitutional investments which led to depreciating value of rupee and it therebyimpacted the Indian economy as india is structurally an import intensive countrythus by adding further pressure on the overall domestic inflation. India nearly imports 83%of its oil requirement thus consuming the largest part offorex reserves. A depreciating rupee has offset the decrease in the internationalprices of the crude oil thus leading to a loss of Rs. 4300 crores. The additional cost of importing crude oil due to weakening rupee without acorresponding increase in the retail prices has put a strain on the oil marketingcompanies. This has led to the declining growth and receipts from quarter toquarter and increasing expenditure. The depreciating rupee and huge losses have led to the increasing accumulationof under recoveries by oil marketing companies of around Rs.1,38,541 crores andit has been projected to reach Rs. 1,87,127 crores in the next financial year. 20. The huge losses and under recoveries have led to manymacroeconomic balances such as india`s external debt stockincreased by 6.6% from US$306.4 billion to US$ 326.6 billion inwhich long term external debt comprises of 78.1%. the trade deficit has increased from US$ 104.4 billion in 2010-2011to US$ 185billion in 2011-2012 leading to huge micro imbalances The current account deficit due to huge trade deficit has increasedfrom US$ 29.6 billion(-2.7% of GDP) in 2010-11 to US$ 32.8 billionin 2011-2012 that is -3.7% of GDP. 21. Diesel subsidy should be reduced as It accounts for 59 per cent of allunder recoveries (since it sells for Rs 41 against petrol selling for Rs 71).It constitutes 38 per cent of all petroleum consumption. Two third of alldiesel is used in transportation, which makes up 6.6 per cent of GDP India is dependant on imported crude oil to the extent of 80% even tomeet the domestic needs yet india has promoted surplus refiningcapacity that exceeds domestic demand by 35%. The surplus refiningcapacity through was created on the back of of multiple subsidiesdisbursed selectively even when refining capacity in public sector wasmore than sufficient jst in order to promote exports which did not addany value to the exports and only succeeded in turning such publicexpenditure to private profit. So, the government needs to reduce thesubsidies given to the petroleum sector this will help in reducing thefiscal deficit and can add to the investment in the energy sector and inR&D for reducing the economy`s oil intensity 22. The government should rationalize the tax structure as it has beenestimated that the total taxes amount to 45% of the final cost of thepetrol. In the year 2010-2011 the total tax receipts of the government(both centre and state) from taxes levied on petroleum sector was Rs.2,25,494 crores a full year earlier in comparison to the under recoveriesto the tune of Rs. 1,38,000 in the financial year 2011-2012. In order to deal with the problem of falling rupee on the petroleumsector, the RBI should open special window for oil marketing companiesto sell them dollar directly to fulfil their obligation of crude oilpayments. The administered price mechanism should be completely replacedby MPDP that is the prices of the petroleum products should bedetermined by the market demand and supply