Editorials/Opinions Analysis For UPSC 25 July 2023

Editorials/Opinions Analysis For UPSC 25 July 2023

Contents

1. The crucial oil reservoir of India
2. India is graded incorrectly

The crucial oil reservoir of India

Context

A government-owned engineering company is examining the salt caverns in Rajasthan to determine whether strategic petroleum reserves may be produced there.

Relevance –

GS Paper 1 – Geography – Natural resources,

GS Paper 3 – Energy

Mains Question

What exactly do you mean by “strategic petroleum reserve”? Why do governments maintain enormous oil reserves? Discussions regarding India’s capability to hold these reserves.  (150 Words)

Global strategic petroleum reserve

• The price of a product is decided by the demand-supply chain in the age of globalisation, which is what the global strategic petroleum reserve is. Because of the interconnectedness of the world’s oil markets, disturbances in one region are likely to have an impact on prices over a much wider region.
• Countries with reserves might enhance the amount of oil on hand in the case of a significant disruption caused by politics or a natural calamity by releasing a portion of their supplies. The increased supply would restrain the price rises brought on by the catastrophe.
• According to an agreement among IEA members, every nation that does not export more reserves than it imports is required to keep reserves equal to its average annual imports of crude oil for 90 days.

Strategic Oil reserves of India

• The endeavour to develop adequate emergency stocks along the lines of the reserves that the US and its Western allies established following the first oil crisis of the 1970s is represented by India’s strategic oil reserves.
• In order to meet the government’s goal of expanding the nation’s capacity for strategic oil storage, the government-owned engineering consultancy firm Engineers India (EIL) is researching the potential and viability of creating salt cavern-based strategic oil reserves in Rajasthan.
• India might obtain the country’s first oil storage facility built inside a salt cavern if the plan is realised. The three strategic oil storage facilities that are now in use by the nation are located in the states of Andhra Pradesh, Mangaluru, and Padur.
• To counteract significant supply interruptions in the global supply chain, nations build strategic crude oil reserves. India, the third-largest consumer of oil in the world, imports more than 85% of what it needs, therefore strategic petroleum reserves (SPR) could assist maintain energy security and availability in times of emergency or disruption in the world’s supply.
• The current SPR capacity of India is 5.33 million tonnes, or roughly 39 million barrels of crude, which can supply the country’s needs for 9.5 days. At Chandikhol in Odisha (4 million tonnes) and Padur (2.5 million tonnes), the nation is currently enlarging its SPR capacity by a total of 6.5 million tonnes.
• The Indian Strategic Petroleum Reserve (ISPRL), a special purpose company under the Petroleum Ministry, is responsible for managing India’s strategic oil reserves. As the project management consultant, EIL played a crucial role in establishing the nation’s current SPR.
• Salt cavern-based storage, which is thought to be less expensive and labour- and cost-intensive than rock caverns, might add a new, crucial chapter to India’s SPR history.

Do You Know?

• India has three strategically important oil deposits, located in the rock caves of Mangaluru, Padur, and Visakhapatnam.
• The state of Rajasthan is chosen for the salt-based cavern petroleum oil reserve project due to its geological and infrastructure advantages and is regarded as an ideal location.

Rock vs. salt cavern reserves: which are more abundant?

• In contrast to underground rock caverns, which are created through excavation, salt caverns are created using a method called solution mining, which entails pumping water into geological formations that contain significant salt deposits and dissolving the salt.
• Crude oil can be stored in the area once brine (water with dissolved salt) has been pumped out of the deposit. Compared to creating excavated rock caverns, the procedure is easier, quicker, and less expensive.Oil storage facilities built in salt caverns are also naturally well-sealed and designed for quick injection and extraction of oil.
• According to a report by the Massachusetts Institute of Technology’s (MIT) Environmental Solutions Initiative, this makes them a more desirable alternative than storing oil in other geological formations.
• These caves are ideal for storage because the salt that lines their interiors has a very low oil absorption, which offers a natural impermeable barrier against liquid and gaseous hydrocarbons. Furthermore, salt cavern-based storages can be built and maintained almost entirely from the surface, unlike rock caverns.
• Up to this point, the United States’ entire SPR programme has relied on storage facilities built in salt caverns. The US Strategic Petroleum Reserve is made up of four locations with deep underground storage caverns built in salt domes along the Gulf of Mexico coast in Texas and Louisiana. It is the largest emergency oil storage facility in the world.
• There are approximately 727 million barrels of strategic oil in the US; natural gas and liquid fuels are also stored in salt caverns around the world. They are also thought to be excellent for storing hydrogen and compressed air.

Potential for storing crude oil and petroleum products in India:

• Rajasthan, which has the majority of the country’s necessary salt deposits, is seen to be the most suitable region for the construction of strategic salt cavern storage facilities.
• The examination of the feasibility of salt cavern-based strategic storage in Rajasthan might be considered as a repeat of the proposal made ten years ago to establish a strategic oil reserve in Bikaner, according to EIL.There will soon be a refinery built in Barmer, and crude pipelines also exist in Rajasthan; such infrastructure is ideal for creating strategic oil reserves.
• However, neither EIL nor any other Indian company possessed the necessary technical know-how to construct a salt cavern-based system for strategic hydrocarbon storage.EIL recently partnered with Germany’s DEEP.KBB GmbH, a business that specialises in cavern storage and solution mining technologies, to overcome this access to technology divide.

Programme for Strategic Petroleum Reserves: Up to This Point –

• The endeavour to develop adequate emergency stocks along the lines of the reserves that the US and its Western allies established following the first oil crisis of the 1970s includes India’s strategic oil reserves.
• The International Energy Agency (IEA), a Paris-based autonomous intergovernmental organisation in which India is a ‘Association’ country, has authorised the government to release crude oil from the reserves in the event of supply disruptions caused by a natural disaster or an unanticipated global event that results in an abnormal increase in prices.

Conclusion

• The oil marketing companies (OMCs) in India have storage facilities for crude oil and petroleum products for 64.5 days, which means there is enough storage to meet approximately 74 days of the country’s petroleum demand.
• This is in addition to the SPR, which are sufficient to meet 9.5 days of oil requirement.
• The Abu Dhabi National Oil Company (ADNOC) stockpiled around 0.8 million tonnes of crude oil in the Mangaluru strategic reserve as part of India’s decision to commercialise its strategic petroleum reserves.
• In order to cut costs and maximise the reserves’ commercial potential, the government plans to create strategic reserves through public-private partnerships in the second phase of the strategy.

India is graded incorrectly

Context

• India is one of the nations that attracts the greatest foreign direct investment (FDI) and foreign portfolio investment (FPI), thanks to a high level of investor trust. International credit rating organisations, on the other hand, seem to have predetermined ideas about how to evaluate India’s economic structure.
• Fitch maintained its outlier sovereign rating at BBB-, which is slightly over investment grade.

Relevance:

GS Paper-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment

Mains Question

Credit rating companies have come under fire for giving India’s sovereign rating an incorrect evaluation. Describe the factors that favour giving India a higher rating and the need for credit rating companies to change their practises in light of the current circumstances. (250 Words)

Companies vs. Sovereigns in Credit Rating

• The idea of a sovereign’s credit rating is distinct from a company’s.
• Credit rating agencies must take this risk into account when assessing a sovereign’s creditworthiness because countries can always print money to repay their debt, even at the risk of high inflation.
• While the agency evaluates the probability of default for companies based on their performance parameters, it evaluates the overall economic structure of the country for sovereigns to determine whether it can default.

Is this assessment appropriate for India?

• For India, however, practically all debt is completely in rupees, and even FPI involvement is in rupee bonds, therefore there is never a case of FX risk for India. Such an appraisal can be justified if countries have external exposure.
• The perception of the economy by investors is the deciding factor in a country’s credibility, thus if international investors are optimistic about India, a rating of only investment grade seems out of the ordinary.
• Since there is complete capital account convertibility there, these investors are genuinely putting their money on the table and have never experienced any problems pulling it out.

Strong Arguments for a Rating Upgrade:

• excellent Growth Statistics: o Even without comparing it to other countries, the growth rates of 7% in FY23 and 6-6.5% predicted for FY24 are pretty excellent.
  • The performance is more than commendable, even though it falls short of the potential of 8–8.5 percent after the Covid blow.
• Nuanced Approach to Fiscal Stimulus: o In comparison to other countries, India took a particularly nuanced approach to fiscal stimulus during the crisis.
  • While expenditure was adjusted by reform and policy actions, revenue was delayed.
  • The industry benefited from using banking channels to provide support, while the financial system benefited from guarantee programmes.
  • There is a commitment to returning to the road of fiscal restraint in a short amount of time.
  • Expenditure is being reduced, as seen by the merger of the free food programme and the food subsidy.
• Banking System Rebound: The Indian banking sector has made a strong comeback and has taken advantage of the epidemic era to straighten out its records.
  • This improves the banking system’s ability to offer financing and makes it possible for the economy to go to a higher development path.

The function of the RBI is as follows:

• Smooth Withdrawal of Accommodation: o In comparison to other countries’ central banks, the RBI has ensured a smoother route to normalcy.
  • In this case, the accommodation withdrawal went well and was done inconspicuously.
  • The interest rates have also changed in this area without having a significant impact on growth. This is significant because bond yields have moved within a smaller range in India, preventing the same level of volatility that has been experienced in the US as a result of the Fed hiking interest rates.
• Strong forex situation: o The RBI has made sure of two things: o First, as the dollar appreciated, the rupee always maintained the median level of depreciation compared to other currencies, ensuring there was no market panic and maintaining the competitive edge for exporters. o Second, forex reserves, which declined primarily due to valuation issues, have regained their level with a comfortable import cover ratio of just above nine months. The balance of payments is greatly aided by this.
• Better quality of public spending: o The Budget boosted the share of capital expenditures from 12–13% before the epidemic to 22% for FY24.
  • Despite the year’s several approaching assembly elections, the Budget has chosen to practise fiscal restraint.
• innovative trade agreements: o India’s ability to pioneer innovative thinking on the trade front, as evidenced in the rupee trade agreement with Russia, which has since won popularity with numerous countries, was a significant development during the year.
  • This is a significant step since these agreements can assist nations in reducing their reliance on the dollar and the euro, which will strengthen their economies.
  • Although going domestic is a novel approach, it is a slow process that will take time to perfect.
  • The rating agencies need to recognise this since it is a model that many emerging nations will find valuable.
• Digitization: India has made incredible progress in this area, from banking to the Covid vaccine campaign.
  • The digitization drive has changed the economy’s structural makeup, making systems more effective.

Conclusion

• In order to maintain their reputation, international credit rating agencies must reinvent themselves and go back to the basics.
• India merits a fair and unbiased assessment given its distinctive domestic business strategy.
• The commentary supplied about India is typically positive, and the low rating given is unjustifiable.
• The rating procedures need to change to reflect the changing times since outdated mindsets undermine the credibility of the rating agencies.
• The rating agencies need to recognise India’s strong economic success and give it the rating it merits.