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India is highly dependent on imported crude oil, making it vulnerable to global price and supply shocks. In this episode, Dr. D. K. Srivastava, Chief Policy Advisor, EY India examines how oil volatility affects inflation, trade deficit, currency, fiscal balances and economic growth of the country. He also explains why India’s refining strength does not eliminate import vulnerability and highlights the importance of diversified sourcing, strategic petroleum reserves and coordinated policy action. The discussion outlines six long-term priorities to strengthen energy security and support resilient economic growth amid increasingly volatile global energy markets.
Key takeaways
Crude oil shocks have macroeconomic implications, affecting inflation, trade, currency, fiscal stability and India’s overall economic growth.
India’s strong refining ecosystem supports exports and sourcing flexibility but has high crude import dependence.
Diversifying crude sources and transportation routes is essential to reduce India’s exposure to geopolitical disruptions and supply concentration risks.
Expanding strategic petroleum reserves can provide a stronger buffer against temporary supply disruptions and excessive global oil price volatility.
Long-term resilience requires coordinated priorities across strategic reserves, sourcing, domestic exploration, refining, price management and energy-mix diversification.
Even though India’s crude refining strength enhances its energy resilience, reducing import dependence remains critical to long-term economic security.
D. K. Srivastava
Chief Policy Advisor, EY India
For your convenience, a full text transcript of this podcast is available on the link below:
Hello and a warm welcome to this edition of the EY India Insights podcast. I am your host Tarrung Kapur. In today's episode, we examine the macro fiscal links of India's petroleum economy and policy measures to build resilience. To facilitate this discussion, we are joined by Dr. DK Srivastava, a distinguished economist and Chief Policy Advisor, EY India. A very warm welcome to you, sir. Thank you for joining us.
DK Srivastava
Thank you, Tarrung.
Tarrung
Can you please explain to us the macroeconomic linkages of crude oil with the Indian economy?
DK Srivastava
The macroeconomic linkages between crude oil and the Indian economy arise primarily from India's high dependance on imported crude. Since petroleum demand is relatively price inelastic, in the short run, consumption does not decline significantly even when international prices rise because energy remains essential for transportation, manufacturing, logistics and agriculture. As a result, higher crude prices quickly translate into a higher import bill.
Now, the first impact is on India's external sector. Since crude petroleum and petroleum products account for more than one-fifth of India's merchandise imports, a sustained increase in crude prices raises the import bill, widens the merchandise trade deficit, worsens the current account balance and can put depreciating pressure on the rupee. A weaker rupee, in turn, makes imports more expensive, creating a second round effect.
The second transmission channel is inflation. Energy is a critical input across almost all sectors of the economy. Higher fuel costs, increased transportation, logistics and production costs, which gradually feed into consumer prices and reduce household purchasing power – these can dampen consumption demand and consequently economic growth.
The third channel relates to fiscal management. During periods of elevated prices, governments often face pressure to cushion consumers through excise duty, reductions or other fiscal measures. While such interventions may moderate inflationary pressures, they can also affect government revenues and fiscal balances.
Tarrung
How should a policymaker view a crude oil price shock?
DK Srivastava
A crude oil shock simultaneously affects inflation, exchange rate, trade balances, fiscal outcomes and economic growth. This is why India's petroleum vulnerability is best viewed as a macroeconomic challenge rather than simply an energy sector issue.
However, it is important to recognize that India's economy is more resilient today than it was two decades ago. The energy intensity of GDP has gradually declined due to the growing share of the services sector in GDP and improvements in energy efficiency. While petroleum remains a significant macroeconomic vulnerability, the economy's dependance on energy per unit of output has moderated over time, providing some cushion against external oil shocks.
Tarrung
India is often described as a major refining power in the area of crude. Yet, we continue to discuss vulnerability of the economy to crude prices. So, how do these two realities coexist?
DK Srivastava
India's refining capacity is one of its major strengths, which is often not recognized by many analysts. Over the years, the country has built a large and sophisticated refining network capable of processing different grades of crude oil. This provides several advantages.
First, it allows India to source crude from a diversified set of suppliers. Second, it saves refining costs that would otherwise have been incurred abroad. Third, it strengthens India's position as an exporter of refined petroleum products, which continue to be among India's important merchandise export categories and helps partially offset the foreign exchange cost of imports. In times of market disruption, refining flexibility also improves resilience because refiners can optimize procurement across different sources, which may have different types of crude that is available.
However, refining capacity does not eliminate the core vulnerability. The critical issue remains that the crude oil entering those refineries is predominantly imported. India's crude oil import dependance has steadily risen and recently reached a level close to 90% of domestic requirements. In other words, refining is a strength but import dependance remains the principal vulnerability.
Tarrung
Thank you for providing us with this clarity. Much of the discussion actually focuses on oil prices but does energy security also depend on where we source our crude?
DK Srivastava
Very much so. Energy security is critically dependent on the diversification of resources and routes for crude imports as evidenced from recent global developments. You will recognize that India has substantially diversified its crude sourcing over the years. Recent data indicate that India is now importing crude from about 40 countries, and its dependance on the Strait of Hormuz has been reduced to 30% from about 45% a few years ago.
Nevertheless, a significant portion of imports continues to originate from regions that are exposed to geopolitical risks. Even as Russia has emerged as a major source of crude imports in recent years, you will recognize that from Russia we are importing crude and exporting to them different petroleum products after refining the Russian crude.
Tarrung
Coming to the next topic of strategic petroleum reserves. Now, these frequently come into public discussion, particularly during geopolitical crisis, such as the Middle East crisis that occurred recently. How important are these reserves for a country like India?
DK Srivastava
Strategic reserves are critical. They serve as a buffer against temporary supply disruptions and excessive price volatility. Building strategic reserves requires decisions regarding:
The optimum size of the reserve stock.
Building of infrastructure to hold the reserves.
The timing of purchase.
The carrying cost.
The timing of release from stock.
Maintenance of a suitable balance of inflows and outflows.
India’s existing strategic reserves capacity provides only four to five days of consumption cover, compared to 92 days for China, 78 days for Japan and 31 days for South Korea, indicating significant scope for future expansion of the capacity of reserves. The encouraging development is that India has already initiated the second phase of its strategic petroleum reserves program. When fully operational, it will significantly enhance the country's ability to cope with vulnerabilities associated with sudden crude supply shocks.
Tarrung
That sounds very encouraging. Whenever oil prices surge, the weight usually centers on whether governments should absorb some of the burden through fiscal measures or allow prices to adjust and rely on monetary policy. How should policy makers think about this trade off?
DK Srivastava
There is rarely a single solution. We have to work on optimal combination of solutions. The appropriate response depends on the nature, magnitude and expected duration of the shock. If the disruption appears temporary, governments may consider calibrated fiscal intervention to prevent excessive volatility in consumer prices. However, prolonged fiscal support can create its own challenges by affecting government revenues and fiscal sustainability.
Monetary policy can play an important role because higher fuel prices can influence inflation expectations and broader price setting behavior. Therefore, successful policy management generally requires careful coordination between fiscal authorities and the central bank, including the Monetary Policy Committee. The objective should be to moderate existing volatility while preserving macroeconomic stability.
Tarrung
Looking beyond the immediate crisis, what should be India's long-term strategy to reduce petroleum vulnerability over the next decade or so?
DK Srivastava
That is definitely so. I would highlight six priorities for India. First, India should continue expanding its strategic petroleum reserves. Second, India should continue diversifying crude import sources and transportation routes to reduce concentration risks. Third, domestic exploration and production deserve greater attention. In this context, the recently approved Samudra Manthan initiative by Government of India with an outlay over INR84,000 crore up to FY31 represents a significant effort to strengthen offshore hydrocarbon exploration and improve long term energy security.
Fourth, India should continue strengthening its refining ecosystem and adopting advanced technologies that improve efficiency and lower production costs. Fifth, there is merit in considering a more structured framework for managing episodes of extreme oil price volatility. And finally, India must continue diversifying its overall energy mix towards nuclear and other forms of energy, particularly renewable energy. Often, energy transition is viewed only in the lens of climate change. However, for India, it is also an issue of economic resilience. The objective is to ensure that India can continue growing at a reasonably high rate, even when global energy markets become volatile.
Tarrung
That is a very comprehensive perspective. Thank you very much for sharing your valuable insights with us.
DK Srivastava
Thank you, Tarrung.
Tarrung
Thank you to all our listeners for joining us on the EY Economy Watch podcast. Stay tuned for more captivating discussions on EY India Insights and do not forget to subscribe for the latest updates. Until next time, this is Tarrung, signing off.
