Impact of US Tariffs on Indian Oil Imports
With the US president increasing tariffs on Indian goods to 50%, there is a significant shift in India's oil import strategy. This move comes as a response to India's purchase of discounted Russian oil, which has grown from 2% to 35-40% of its total imports since the Ukraine invasion in 2022.
Russian Oil Imports and Economic Implications
- India benefited from discounted Russian oil, reducing its oil import bill by $7-10 billion in 2024, bringing it to $186 billion.
- The discount on Russian oil has narrowed to $3-8/barrel, prompting a shift towards Middle Eastern and Brazilian suppliers, with price increases of $4-5/barrel.
Potential Effects of Reduced Russian Oil Imports
India's move to diversify oil sources could lead to higher global oil prices, increasing the import bill. The economists suggest a $1.8 billion increase for every $1 rise in global crude prices.
Domestic Economic Impact
- The government is likely to keep domestic pump prices constant, minimizing inflation and growth impacts.
- Public sector oil companies might bear the transition costs, with potential government compensation necessary to cover under-recoveries.
- Despite the changes, the risk to India's fiscal deficit target of 4.4% of GDP is considered minimal.
Shift in Import Patterns
- India is increasing its US crude imports, with an average of 225 thousand barrels per day since May, and has the potential to reach previous highs of ~300 thousand barrels per day as in 2021.
Conclusion
While India is unlikely to completely stop Russian oil imports, the situation has led to strategic shifts in sourcing and potential negotiations with the US to increase bilateral energy trade, currently valued at $7.5 billion annually.
