Context: Along with the COVID-19 pandemic, the Gulf region is at the epicentre of a perfect storm in the name of an oil price meltdown. It calls for careful treading on India’s part given the bilateral economic ties with eight gulf countries.
Background: Rock Bottom Oil prices
- Demand supply mismatch: Owing to the COVID-19 pandemic outbreak, the global order has entered into a lockdown, in turn curbing the consumption of hydrocarbons, the economic driver of Gulf economies.
- As per a Goldman Sachs report, COVID-19 had lowered the world crude consumption by 28 million bpd.
- The consequent oil supply in excess has brought the oil prices down.
- No consensus among nations: Another reason came in as the Organization of the Petroleum Exporting Countries and other crude producers (OPEC+), failed to reach upon a consensus of a production-curtailing strategy due to Saudi-Russia tussle.
- As a consequence of it, the oil prices went at a rock bottom level having fallen by 55%.
Probable impact of Oil price meltdown on Gulf Economy
- The heads of OPEC and the International Energy Agency (IEA) warned that developing countries’ oil and gas revenues will decline by a level of 50% to 85% in 2020.
- It will entail far-reaching economic and social consequences.
- The economic outlook for the Gulf has deteriorated in real terms.
- Saudi Arabia’s fiscal deficit expected to breach a level of 8% in 2020.
- With the looming threat of a global recession, post COVID-19 growth will be slow and less energy-intensive.
- With more countries focusing on National self-reliance vis-a-vis strategic goods such as pharmaceuticals, their trade will be deterred.
- The tourism and hospitality sectors may not revive in the near future, impacting the core of Dubai’s economy.
- Along with that, the annual Hajj pilgrimage also seems doubtful.
India’s Economic ties with the Gulf states
It rests upon two dominant verticals.
The Economic Essence
- The India-Gulf trade was in tune of around $162 billion in 2018-19.
- It amounts to nearly a fifth of India’s global trade.
- The trade is dominated by import of crude oil and natural gas worth nearly $75 billion, meeting nearly 65% of India’s total requirements.
- Some of the gulf countries have large Indian investments and some have planned large investments in India.
- Indian expatriates in the Gulf states remitted nearly $40 billion to India, in turn strengthening BoP accounts.
A huge number
- The number of Indian expatriates in the Gulf states is about nine million.
Soft power and Social remittance
- Diaspora lies in the realm of soft power in the foreign policy strategy.
- In addition to economic remittances, the role of social remittance is also significant as Gulf migrants bring them home.
What is Social remittance ?
It refers to new ideas, know-how, work culture, discipline, knowledge, scientific outlook, new skills, etc.
Impact of COVID-19 and meltdown in oil prices on these dominant Verticals
Impact on indian Economy
- Positive Impacts
- India, having dependent heavily on the import of crude oil for its Energy needs, a sharp and prolonged decline in oil prices helps bridging its current account deficit.
- Negative Impacts
- The Gulf’s lower oil revenues also point to decreased bilateral trade and investments.
- It also means lowering of expatriates’ remittances.
- Cumulatively, they hold the potential to add to India’s current financial stress.
Impact on Indian Diaspora
- Oil being a cyclic commodity is subject to periodic highs and lows.In case of lows, the burden trickles down to the last person in line i.e. the Asian Expatriate.
- It reflects in decline in fresh recruitments, lower salaries, localised recruitment drives in turn forcing expatriates to return to their indigenous place.
- The prescribed norms of social distancing are difficult to implement in the densely populated camps of Asian expatriates, leading to increased vulnerability.
- Above factors result in unprecedented exodus of Indian expatriates, putting a huge load on India’s already burdened employment scenario, and overall economy.
- Short term
- India needs to follow up with some contingency plans in consultation with the individual countries.
- India should take initiatives to enhance their capacity to handle COVID-19 cases among the Indian expatriates.
- It should also keep a tab on the situation and try to avoid panic among its nationals.
- Long term
- There is a need to find new drivers for the India-Gulf synergy that would diversify the India-Gulf economic ties to protect them from such immediate shocks.
- It could possibly look for a cooperation in healthcare and gradually extend outward towards pharmaceutical research and production.
- India also can cooperate upon building infrastructure in India and in third countries.
- Petrochemical complexes, agriculture, education and skilling may be explored for further cooperation.
- India can also seek cooperation in development of India-Gulf Cooperation Council Free Trade Area, comprising bilateral free zones created along the Arabian Sea coast of India.
International Energy Agency
- It came into being in the backdrop of the 1973 (set up in 1974) oil crisis which led to steep increase in oil prices by the OPEC cartel.
- It is headquartered in Paris, France.
- It is an organisation of autonomous nature, that works to facilitate reliable, affordable and clean energy to its 30 member countries, 8 association countries in its ambit and beyond.
Areas of Focus
The IEA has four main areas of focus,namely
- Energy security,
- Economic development,
- Environmental awareness
- Engagement worldwide.
More on IEA
- India became an associate member of International Energy Agency in 2017.
- Mexico officially became the 30th member country of IEA in 2018, and its first member in Latin America.
It is a permanent, intergovernmental organization, headquartered in Vienna, Austria.
- Founder Members: The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.
- Currently, the Organization has a total of 14 Member Countries.
- OPEC’s objective is
- to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers;
- an efficient, economic and regular supply of petroleum to consuming nations; and
- a fair return on capital to those investing in the industry.
- OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
- OPEC+ refers to the alliance of crude producers, who have been undertaking corrections in supply in the oil markets since 2017.
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
- The Opec and non-Opec producers first formed the alliance at a historic meeting in Algiers in 2016.
- The aim was to undertake production restrictions to help revive a swinging market.
- The Persian gulf region consist of Eight gulf countries consist of Bahrain, Iran, Iraq, UAE, Saudi Arabia, Qatar, Kuwait, and Oman.
Gulf Cooperation Council
- The Gulf Cooperation Council (GCC) is a political and economic alliance of six countries in the Arabian Peninsula: namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
- It was established in 1981.
- It is headquartered at Riyadh, Saudi Arabia.
- The GCC promotes economic, security, cultural and social cooperation between the six states
- It also holds an annual summit to discuss cooperation and regional affairs.
More about GCC
- In 1984, the GCC established a standing coalition land force, the Peninsular Shield Force, tasked to defend the six nation states. It is composed of infantry, armour, artillery and combat support elements from each of the states, numbering 40,000 in total.
- Qatar and GCC - Saudi Arabia, UAE, Bahrain and non-GCC member Egypt imposed a political and economic boycott of Qatar in June 2017 over allegations of Doha backed terrorism related activities,
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