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Food, energy crises hit Pakistan, India hard

* CSIS members say steady increase in energy consumption, high import dependence causes of high energy prices

By Khalid Hasan

WASHINGTON: The current food and energy crisis bears serious strategic implications for India, Pakistan, and the region at large, according to a study.

Krishna Sutaria and Jonathan Robins of the Centre for Strategic and International Studies (CSIS) write in the current issue of South Asia Monitor, a CSIS monthly publication, that while rising energy costs have exacerbated inflation and commodity prices, the shortage of food in India and Pakistan reflects a more endemic need to deal with a lagging agricultural sector. The two countries have different and diverse energy mixes. More than 60 percent of India’s energy needs are satisfied by coal, 90 percent of which is domestically produced. Pakistan derives more than 50 percent of its energy from natural gas, almost all of which is domestically produced.

In both countries, oil remains a secondary source, but one that is vitally important for transportation and the modern parts of the economy.

High energy prices: The authors argue that what makes the two countries vulnerable to high energy prices is the steady increase in their energy consumption and their high import dependence. India imports nearly 67 percent of its oil from the rest of the world, two-thirds of which comes from the Middle East. Pakistan imports 80 percent of its crude oil, mostly from the Persian Gulf. Increasing energy prices affect the Indian and Pakistani economies mainly through balance of payments and the national budget. India spent $61 billion on oil imports in 2006, or 33 percent of its import bill. Even after subtracting the $19 billion it earned from exports of refined petroleum products, oil was its largest import. Since then, international prices have doubled. This will strain India’s balance of payments, although India’s high reserves will protect it from an immediate crisis.

For Pakistan, oil represented 28 percent of its imports in 2006-07, and the value of oil imports is likely to increase by at least 50 percent in 2007-08. Pakistan’s trade balance is more unfavourable than India’s, and its reserves are much lower, barely $11 billion. Consequently, the impact on Pakistan’s reserve position will be more severe, unless Pakistan receives financial assistance.

Politically, write Sutaria and Robins, the most painful effect of rising oil prices has been on the price of basic fuels. In June 2008, with few alternatives left and to prevent a financial meltdown of the state-owned companies, the federal government raised the price of petrol, diesel, and kerosene. Pakistan has also carried out price hikes similar to India’s. Natural gas prices in Pakistan, which rose by 46 percent between May 2007 and May 2008, rose by another 30 percent in the first half of July, while petrol and diesel prices went up by 20 percent in the same timeframe. The problem has been compounded by Pakistan’s inability to increase its electricity-generating capacity in the past decade, making power cuts a fact of life around the country.

The two analysts maintain that in both countries, the price hikes have contributed to a spike in inflation. India’s wholesale prices in mid-June were about 11 percent higher than last year, while Pakistan’s inflation rate hit 20 percent year on year in May.

Given that international energy prices fluctuate, it is plausible that oil prices may eventually fall from today’s level, but one thing is clear - India will continue to struggle between the twin perils of a yawning budget deficit and rising prices for politically sensitive goods. Pakistan’s domestic price structure situation is less severe, but it faces the same need to expand its energy supply and has a more problematic current account deficit. This will inevitably translate into new requests for financial assistance from its international allies.

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