Reducing oil import dependence requires India to also curb its demand for oil
)
Illustration: Binay Sinha
Listen to This Article
The West Asia crisis is rippling through the Indian economy in multiple ways, with energy commodities, especially crude oil, having one of the biggest impacts. Crude oil prices have risen a staggering 60 per cent since the conflict started in late February.
Despite declining, oil and oil products still account for a quarter of India’s total energy supply. India’s rising oil import dependence — with over 85 per cent of the domestic requirement being imported — makes it structurally vulnerable.
We import crude oil and export only a part of it as refined petroleum products. As the volume and cost of imports far exceed those of petroleum exports, there is a persistent oil trade deficit, which stood at $120 billion in FY26.
Typically, when crude oil prices fell, India’s oil trade deficit came down, and vice versa. But since the past two financial years (2024-25 and 2025-26) this relationship has broken down.
Despite cheaper crude oil — with the average price falling 15 per cent from $83 per barrel in FY24 to $70.3 per barrel in FY26 — India’s oil trade deficit surged 27 per cent, from $94.5 billion to $120 billion, because exports of petroleum products slipped.
There were largely three reasons for the softer global oil demand: The waning of post-pandemic surge in mobility, sluggish industrial growth, and the rising adoption of electric vehicles.
In India, the trend has gone the other way: Imports of crude oil have kept rising due to the country being the fastest-growing large economy. Not surprisingly, then, oil has been the largest contributor to India’s goods trade deficit in the two financial years since 2024. Worryingly, the current surge in crude oil prices could be sticky.
Crude oil markets are facing a significant supply deficit due to the closure of the Strait of Hormuz and damage to oil production facilities in West Asia. Even if the transit conditions via the Strait of Hormuz improve, it will take time for the production apparatus destroyed by the West Asia conflict to return to normal.
Crisil expects Brent crude price to average $90-95 per barrel this financial year, compared with $70.3 per barrel last financial year. Consequently, India’s oil trade deficit is set to go up even further in FY27.
The rising oil trade deficit, among other factors, will widen India’s current account deficit to 2.2 per cent of gross domestic product this financial year, a sharp jump from around 0.8 per cent last financial year.
That, along with expected weak capital inflows — as in the past two financial years — will mean the pressure on the rupee and forex reserves will remain elevated.
S&P Global expects India’s oil dependency to rise closer to 94 per cent from 85 per cent by 2030 (India forward: Strategic initiatives, S&P Global, May 2026).
This is in sync with the International Energy Agency’s (IEA) latest medium-term global demand projection (Oil 2025: Analysis and Forecast to 2030) of June 2025, which captured these trends before the current West Asia-driven disruptions.
The IEA said India’s demand for crude oil
will rise by 1 million barrels/day in the forecast period (2024 to 2030), the largest increase for any country by far, driven by rapid urbanisation, relatively strong industrial growth, and a booming transportation sector. On the other hand, global demand is seen remaining in the slow lane, even contracting in 2030.
While subdued global growth prospects will weigh on demand, the most significant long-term factor, the IEA said, is the rapid shift to electric vehicles. To boot, work-from-home (WFH) practices are enduring in many parts. So, India’s oil trade deficit is headed higher over the medium to long run.
To tide over the current oil disruption, the government is trying to manage through austerity measures and moral suasion — pushing for WFH, to wit. Until recently, oil marketing companies and the government were absorbing the burden of higher oil prices. Now, it is being gradually passed on to the end consumer. A price signal to manage demand was sent recently when, in two tranches, petrol and diesel were made dearer at the pump.
As for supply, crude oil is being procured from alternative sources through deft diplomacy. The lifting of sanctions on Russian oil also helps. To manage demand in the medium to long term, diversification of supplies should continue, and strategic reserves need to be shored up. Prime Minister Narendra Modi, during his recent visit to the United Arab Emirates, signed a series of landmark agreements towards this. One of the pacts includes a strategic collaboration agreement between Indian Strategic Petroleum Reserves Ltd and Abu Dhabi National Oil Company to strengthen India’s energy security.
Prioritising the use of available domestic energy sources is crucial for ensuring energy security and affordability in times of geopolitical flux. Curbing import dependence also requires a concerted push towards upstream exploration. To its credit, the government has begun moving in that direction. The recent reduction in royalty rates on crude oil and natural gas production is intended to encourage domestic exploration and improve investment visibility. The Samudra Manthan programme is aimed at deep-sea exploration of oil, gas and critical minerals. These need to be pursued on a war footing. But these initiatives have long gestation periods, often layered with uncertainties, so there is a need to simultaneously find additional, more certain, paths to reduce crude oil import dependence as well.
The newly announced target of 100 per cent ethanol blending, after already achieving 20 per cent blending, is a step in that direction. A sharper focus on developing better and more widespread EV infrastructure, along with more investment towards improving public transportation (high-speed rails, metro networks, etc), is also desirable.
Coal is the largest source of primary energy in India and import dependence on it is low, with domestic production meeting over 70 per cent of demand. While cleaner coal technologies can be adopted, coal-based power will continue to provide essential base-load capacity, given the intermittent nature of renewable energy. This approach will facilitate faster investments in renewables, particularly solar power, where India has already made significant progress. Additionally, accelerating the adoption of nuclear technology to reach a target of around 22 gigawatts (Gw) by 2031-32 should be a relentless quest.
With India’s oil trade deficit set to become structurally larger in a business-as-usual scenario, ways to reduce import dependence must shift from a long-term aspiration to immediate, actionable priorities.
This is aligned with the goal of achieving Viksit Bharat 2047 through greater atmanirbharta.
The authors are, respectively, chief economist and senior economist at Crisil Ltd
aniltikotekar4sme.com 