Globalization and its impact on indias petroleum exports


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Globalization and its impact on indias petroleum exports

  1. 1. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 –(IJM) INTERNATIONAL JOURNAL OF MANAGEMENT 6510(Online),Volume 3, Issue 3, September- December (2012)ISSN 0976 – 6367(Print)ISSN 0976 – 6375(Online)Volume 3, Issue 3, September- December (2012), pp. 17-24 IJM© IAEME: ©IAEMEJournal Impact Factor (2012): 3.5420 (Calculated by GISI) GLOBALIZATION AND ITS IMPACT ON INDIA’S PETROLEUM EXPORTS J.P.Sreeja, Research Scholar, P.G. Department of Economics and Research Centre, S.T. Hindu College, Nagercoil e-mail: Dr.A.Meenakshi Sundara Rajan, Principal, S.T.Hindu College, NagercoilABSTRACTThe core objective of introduction of globalization in India was to improve the economic growthrate along with other macroeconomic objectives. The current account in the balance of paymentsis a mirror of the economic growth of a country. Balance of payments difficulties in a countrymay be created due to factors like weak domestic financial systems; large and persistent fiscaldeficits; high levels of external and/or public debt; exchange rates fixed at inappropriate levels;natural disasters; or armed conflicts or a sudden and strong increase in the price of keycommodities such as food and fuel. The trade in oil and oil products have had a significant rolein India’s trade. The objective of the paper is to analyze the impact of globalization on the exportof petroleum in India’s balance of payments.Keywords: globalization, balance of payments, petroleum products, crude oil, multilateralfunding agencies, foreign tradeINTRODUCTIONIndian economy has been subject to continuous financial shocks, price hikes in petroleum andrelated products and inflationary conditions in the recent years. A macroeconomic crisis in Indiahas usually been dominated by balance of payments difficulties and has forced the country todevalue its currency either by external or internal factors in 1965-67, the early 1980s and 1991. 17
  2. 2. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012)Moreover it is to be noted that the oil shocks occurring outside India have affected the economyharshly causing balance of payments difficulties and as a result devaluing the rupee against theUS dollar.Crude oil, especially petroleum is one of the most necessitated worldwide required commodity.Oil is a key factor in each and every economy of the world. The need and demand for oil and itsby-products are increasing and every country in the world is ready to import oil to meet itsdomestic requirement. This helps the oil exporting nations to earn a huge share of their foreignincome directly or indirectly. Oil shocks came to the world when in 1973 and in 1979 the oilprices shot up. This shook even the strongest economies of the world. This happened on accountof the fact that the gulf countries refused to supply oil to the countries that were the supporters ofIsrael in its war with Egypt and Syria. Crude oil alone bears 60% share to meet the globalenergy needs in the current scenario. The reason for this high share in the primary energyconsumption in the world is due to the advantages that oil has over the other constituents ofprimary energy such as diverse application, comparatively lesser harm to the environment, easyhandling, lower capital costs and above all higher efficiency.Crude oil reserves on earth are estimated to be more than 1 trillion barrels that are mostly foundin the Middle East, Eastern Europe, Africa and Central America, Middle East being the topreserve holder. It is a clear fact that oil is a limited resource and would finish off in a maximumof 80 years if the current rate of consumption continues. Of these 1 trillion barrels, the worldproduces around 75 million barrels per day. The largest crude oil producing country is SaudiArabia followed by Russia and United States of America.Historically, the Indian petroleum industry was controlled by few Anglo-American companies.They maintained their dominance till end of 1950s. After independence (1947), the newlyindependent state wanted to play significant role in this vital industry. The industry policyresolution of 1948 and 1956 have clearly documented the governments aspiration and futureplans for core industries like petroleum. All future development of petroleum industry wasreserved for public sector undertakings. But foreign assistance was a necessity at least in theearly stage. As collaboration with Anglo- American oil majors were ruled out, other alternativeswere explored.At that time the government considered four options as under for the development of itspetroleum industry. Firstly, to seek assistance of a great power like Soviet Union. Secondly, tocollaborate with a small country like Rumania. Thirdly, to explore the possibility of agovernment to government co-operation with other small but neutral countries like Austria whichhad developed sufficient technical expertise in petroleum industry by that time and lastly, to tryand develop the industry through self-help by employing technicians and bringing necessarymachinery from which ever source available.Of the above four alternatives, though co-operation with a small but neutral power like Austriawas thought the best option, the government went for the first alternative. Thus the Soviets tookcharge of the nascent oil industry. However, their influence diminished over the years.Subsequently, US companies and multilateral funding agencies like World Bank playedincreasingly significant roles in this sector.In the early seventies, the government of India nationalised the refinery and marketing facilitiesof three foreign oil companies. Out of those three Burmah -Shell -, the British companydesperately tried to stay in India even as junior partner to a joint venture with a national oilcompany . At that time Cochin and Madras refineries were running under joint venture betweenthe govt. of India and foreign oil companies. But the government did not accept Burmah-Shells 18
  3. 3. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012)proposal. The other two American companies - namely Caltex and Standard Vaccum werethemselves eager to leave the country due to their internal organisational restructuring anddomestic compulsions. The government of Indias decision to nationalise them had nothing to dowith their departure from the marketing and refining sector. However, they kept their linkagesalive with the industry through crude supplies.Apart from nationalisation of foreign companies, there were other important developmentsduring seventies and eighties which needs to be mentioned here to understand the liberalisationprocess of this industry. • i) As offshore exploration got more importance (though substantial areas of onshore sedimentary basins were unexplored), involvement of US companies increased replacing the Soviets. In offshore exploration and exploitation, Indias dependence on American and other Western companies were almost total. • ii) In 1974, the government offered 7 million acres of Bay of Bengal to Natamas Carlsburg Co. of USA for offshore exploration and production. A contract was entered into between the US company and Oil and Natural Gas Commission (ONGC) for the same. Subsequently another contract between Readings and Bates, USA and ONGC for Kutch basin(Gujarat) was signed. It was agreed that initially the foreign company would have 61% share in the joint venture and the price of the crude if produced would be based on Indonesian and Persian Gulf crude. 40% of the total crude would go to the US company as "Cost Oil" towards recovery of their expenses. 65% of the remaining crude would be ONGCs share and rest 35% would go to the US company. However, the venture was unsuccessful. • iii) Since 1980, the government started to offer in a systematic way different sedimentary basins to foreign oil companies for exploration and production. Better basins with liberal terms were offered in successive rounds. For example, in the third round (1986) where few major foreign companies participated, the government exempted them from paying any royalty payment. Moreover, no minimum expenditure commitment were to be made and ONGC/OIL was given the option to take minority stake (40%) in the joint venture, if the fields were found viable. However, there was no breakthrough in exploration by the foreign companies. • iv) Till 1990, the government had invited four proposals for bidding. Due to political changes finalization of contracts against the fourth round of bidding was deferred. One noticeable feature of the fourth round was that, Indian private companies (along with foreign partners) were allowed to participate for the first time. As no major field was discovered by foreign companies, the government over exploited the existing fields. At a time when the global crude price was declining, India’s crude production was increased steeply from 10.51 MMTPA in 1980-81 to 34.00 MMTPA in 1989-90. The oil bearing wells were flogged to death and as a consequence, production fell to 26.92 MMTPA in 1992-93. • v) In the eighties, the government allowed Indian private companies to enter into refining sector initially as a joint venture partner with a public sector refining company. Later, Reliance Industries Ltd.(RIL) was allowed to build on their own the largest refinery in the country. • vi) For refining technology, the public sector refineries, during 1980s, were almost completely dependant on one American company M/s Universal Oil Products (UOP).UOP did not transfer their technology to the refineries. They leased it 19
  4. 4. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012) simultaneously to more than one Indian refineries at a time. Thus, the technology could not be absorbed. • viii) The marketing policy followed by the public sector companies has made the economy and the society completely dependent on petroleum products. It has successfully replaced/barred entry of other alternative energy sources including natural gas.METHODOLOGYSignificance of the problem:It is believed that the balance of payments position of India is on the razor’s edge. This is onaccount of India’s inflationary pressures, sustained increase in prices of petrol and alliedproducts which has led to current account deficit. Diversion of output of petroleum products tooverseas markets creates supply shortages in the domestic market. This has created an urgency tofind out where these conditions are heading and how long the same will continue. The sharp dropin exports and higher oil prices are offsetting the improvement in the country’s tradedeficit. Hence this article attempts to find out the export of petroleum from India before andafter globalization.Objective:The objective of the present study is to find out the impact of globalization on India’s petroleumproducts.Period of study: The period of study is from 1950 to 2010. The data contains the export ofpetroleum from the balance of payments compiled by the Reserve Bank of India. This timeperiod has been analysed in order to find out the export of petroleum before and afterglobalization and hence to find out the impact.Data Collection:Data has been collected through secondary sources only. The major sources of data collectionare: which is the website of Reserve Bank of India, India’s Central Bank,Handbook of Statistics on Indian Economy, 2009-10, Sep 15, 2010, prepared by the ReserveBank of India.Analysis:Analysis of the data has been done using tables and charts.Limitations of the study: The data has been collected and analyzed on the basis of millions of US dollars. The inflationrate of the two countries has been assumed to be constant and other factors such as exchange rateand fluctuations in the economy due to various other foreign trade policies have not beenconsidered.In order to find the impact of globalization on petroleum products the exports and imports of theproducts have been considered before and after globalization. 20
  5. 5. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012)Table 1: Exports of Petroleum Products prior to globalization (US$ million) Exports (in US$ YEAR million) 1970-71 16.6 1971-72 15.5 1972-73 41.9 1973-74 19.7 1974-75 42.1 1975-76 42.1 1976-77 36.7 1977-78 32.4 1978-79 24.1 1979-80 26.2 1980-81 35.2 1981-82 250.8 1982-83 1283.3 1983-84 1537.8 1984-85 1533.4 1985-86 535.3 1986-87 326.8 1987-88 500.4 1988-89 348.7 1989-90 418.4 1990-91 522.7Source: DGCI&S, CalcuttaTable 1 shows that there was an infinitesimal amount of exports of petroleum products till 1980-81. This was especially due to the fact that crude petroleum exports were nil in all the yearsexcept in the year 1971-72 and 1972-73. The exports of crude petroleum in those years wereUS$ 2.2 million and US$ 20.4 million respectively. The initiation of the exports of crudepetroleum started only in 1981-82with the peak amount of US$ 1,537.8 million. India’s energypolicy, till the end of the 1980s was mainly based on availability of indigenous resources.Despite its size, India plays a relatively small role in the world economy. Until the 1980s, theIndian government did not make exports a priority. In the 1950s and 1960s, Indian officialsbelieved that trade was biased against developing countries and that prospects for exports wereseverely limited. Therefore, the government aimed at self-sufficiency in most products throughimport substitution, with exports covering the cost of residual import requirements. Foreign tradewas subjected to strict government controls, which consisted of an all-inclusive system of foreignexchange and direct controls over imports and exports. As a result, India’s share of world tradeshrank from 2.4 percent in financial year 1951 to 0.4 percent in financial year 1980. Largelybecause of oil price increases in the 1970s, which contributed to balance of payments difficulties, 21
  6. 6. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012)governments in the 1970s and1980s placed more emphasis on the promotion of exports. Theyhoped exports would provide foreign exchange needed for the import of oil and high-technologycapital goods. Nevertheless, in the early 1990s India’s share of world trade stood at only 0.5percent. In financial year 1992, imports accounted for 9.3 percent of GDP and exports for 7.7percent of GDP.1The export of petroleum products prior to globalization has been depicted in the following chart: Figure 1:Export of Petroleum Products prior to Globalization (US$ Million) Export of Petroleum Products (US$ Million) 1800 1600 1400 1200 1000 800 600 400 200 0 YEARExports of Petroleum Products after globalization (US$ million):After the adoption of liberalization and privatization in July 1991 the government startedallowing the Indian petroleum industry to go into private hands and also entered into governmentand private joint ventures. The government also eased the stringent regulation process on thepetroleum industry. This gave a tremendous boost to the petroleum industry in India. Theindustry began to grow at a tremendous pace. The production of petroleum and petroleumproducts also showed a significant rise. The mean value of exports of petroleum goods afterglobalization was 5912.75 which is much higher than that prior to globalization. The exports ofpetroleum products after globalization have been shown in the following table: 22
  7. 7. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012)Table 2: Exports of Petroleum Products after globalization (US$ million) Exports (in US$ Year million) 1991-92 414.7 1992-93 476.2 1993-94 397.8 1994-95 416.9 1995-96 453.7 1996-97 481.8 1997-98 352.8 1998-99 89.4 1999-00 38.9 2000-01 1869.7 2001-02 2119.1 2002-03 2576.5 2003-04 3568.4 2004-05 6989.3 2005-06 11639.6 2006-07 18634.6 2007-08 28363.1 2008-09 27547Source: DGCI&S, CalcuttaTable 2 highlights the export of petroleum products after globalization and it was noted that thesame were also not very attractive. It declined to an amount of a meager US$ 38.9 million in1999-2000 but then it astonishingly sparked up to US$ 1869.7 million in the very next year.Since then there was a steady growth in the exports and in 2007-08 it reached an amount of US$28363.1 million which was attractive compared to most of the other years. The growth in thepetroleum exports can be attributed to the increase in installed capacity of the refineries by 18per cent from 112,040,000 tonnes in the FY 2000 to 132,468,000 tonnes in FY 2006. 2 Export ofpetroleum products after globalization has been depicted in the following chart also: 23
  8. 8. International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online),Volume 3, Issue 3, September- December (2012) Figure 2: Export of Petroleum Products after Globalization (US$ Million) 30000 Export of Petroleum Products (US$ Million) 25000 20000 15000 10000 5000 0 YEARFrom the above it can be concluded that before globalization, the exports of these products wereinfinitesimal till 1981-82. The reason was that India’s energy policy till the end of 1980s wasbased on availability of indigenous resources. Government aimed at self sufficiency throughimport substitution and exports covering the cost of residual import requirements. The oil priceincreases in 1970s contributed to BOP difficulties. It was noted that in the early 1990s, India’sshare in the world trade stood at 0.5 percent In the financial year 1991-92 the imports were 9.3percent of GDP and exports were 7.7 percent of GDP. After globalization the government easedstringent regulation process on the petroleum industry and hence the industry grew at atremendous pace. There was a sparking increase in exports of petroleum in 2000-01 andsimilarly in 2007-08 also there was an attractive increase. The reason can be attributed to anincrease in installed capacity of refineries from 112,040,000 tonnes in financial year 2000 to132,468,000 tonnes in financial year 2006.REFERENCES1) India trade 1995 LOC data, “ BUSINESS IN INDIA DOING BUSINESS IN INDIA - IndiaTrade”, 24