MAJOR INDIAN CONSUMPTION
EIA - India is a major contributor to the growth in global liquid fuels consumption. Total liquid fuels consumption in India grew 8% in 2016, the largest increase since 2009, to an estimated 4.35 million barrels per day (b/d). EIA estimates that in 2015 and 2016, Indian liquid fuels consumption growth constituted 19% and 20%, respectively, of the net global growth in liquid fuels consumption. However, according to preliminary estimates from India's Ministry of Petroleum and Natural Gas, Indian liquid fuels consumption fell 3% in the first quarter of 2017 compared with the same quarter in 2016, the first year-over-year quarterly decline since 2013.
The reported decline in consumption occurred in many petroleum products including diesel and gasoline (Figure 1), which accounted for, on average, 39% and 12%, respectively, of total Indian liquid fuels consumption since the beginning of 2016. The slowdown in liquid fuels consumption is likely related at least in part to India's recent efforts to reduce the size of its informal economy, where transactions are done mainly in cash and may be either illegal or untaxed. The impacts of this effort on oil consumption may be gradually subsiding, as liquid fuels consumption rose at the start of the second quarter of 2017.
In November 2016, India announced the immediate invalidation of the 500 and 1,000 Indian rupee (INR) banknotes (demonetization), the two largest banknotes then in use. Equivalent to about $7.50 and $15.00 at the time, respectively, these two banknotes together accounted for roughly 86% of the total value of currency in circulation. The old banknotes had to be deposited in banks by the end of 2016 in order to keep the currency's value in the form of credit or, with restrictions, be exchanged for new 500 and 2,000 INR banknotes, if available. A few exemptions permitted the use of old banknotes under certain circumstances, including purchasing fuel at gasoline stations and buying cooking gas cylinders, for a limited time beyond the date of the announcement.
Because India's economy relies significantly on cash, the demonetization announcement, along with delays in distributing new banknotes, resulted in cash shortages that likely impacted consumers' and businesses' ability to purchase goods and services. India's gross domestic product (GDP) in the fourth quarter of 2016 grew 7%, a slight deceleration from previous quarters. However, the negative impact of demonetization on activity within India's informal economy, which is difficult to measure from official GDP statistics, may have been larger than in the formal economy because of a greater reliance on cash transactions.
Changes to money supply can give a general sense of the amount of cash taken out of the Indian economy and the possible effects it may have had on oil consumption. According to the Reserve Bank of India, money supply dropped significantly after demonetization but has been recovering over the past six months (Figure 2). On December 9, one month following the demonetization announcement, M1, a metric of money supply that measures physical banknotes, checking accounts, and other highly liquid forms of money supply, was just below 20 trillion INR, 28% below the level at the end of October 2016. However, by the end of April 2017, India's M1 was just 6% lower than the level at the end of October 2016, at 26 trillion INR. The actual level of physical banknotes in circulation has not recovered as quickly as the overall M1 because some of the currency that was invalidated and deposited in banks remains in other liquid forms of money supply, such as checking accounts.
With the disruption in money supply, consumers could not spend as much to purchase items, likely impacting sales of energy commodities. Demonetization also affected smaller businesses because of reduced demand for their goods and services and their inability to pay workers if they rely on cash payments. A measure of business activity within the services industry showed a significant slowdown in the immediate months after demonetization. The Services Purchasing Managers' Index (PMI) in India fell below 50 in November, December, and January, indicating a contraction in activity in the services industry. Since then, the Services PMI has risen above 50, indicating expansion in the services industry from February to April 2017. Similarly, the Manufacturing PMI in December 2016, before rising and remaining above 50 since January 2017. The contraction in the manufacturing sector may have contributed to the decline in India's diesel consumption, which fell by 8% in January and 1% in February compared with the previous year, before recovering slightly in March.
Gasoline consumption in India declined 1% year-over-year in January 2017 before showing growth again in February and March. After the limited extension allowing for the use of old banknotes at gasoline stations expired, cash shortages likely reduced fuel purchases. Further, vehicle sales themselves sharply declined in the immediate months after the demonetization announcement. After reaching a record high of 2.3 million total vehicles (including two-wheeler vehicles) sold in September 2016, total vehicle sales in India dropped year-over-year in November, December, and January before beginning to recover. Two-wheeler vehicles, which typically use gasoline and include mopeds, scooters, and motorcycles, were particularly impacted. Two-wheeler vehicles comprised 81%, on average, of vehicles sold each month since the beginning of 2013 and make up a substantial majority of the existing vehicle fleet in India (Figure 3). Because it is generally cheaper to purchase two-wheeler vehicles than cars, paying with cash is a feasible option for some consumers. As a result, cash shortages could have impacted their sales after demonetization.
In addition to diesel and gasoline, consumption of several other petroleum products, including kerosene and petroleum coke, declined. Although demonetization may have affected kerosene consumption to some degree, fundamental changes to the kerosene market in India have been a greater factor to kerosene consumption trends. Kerosene consumption in India has been generally declining over the past couple of decades, but has sharply declined since the latter half of 2016. Kerosene is used primarily by lower-income households in more rural areas as a cooking fuel and for lighting. With greater access to electricity and cooking fuel substitutes, subsidies of kerosene are gradually being phased out and consumption of kerosene is declining. Kerosene consumption on average has been just 3% of total Indian liquid fuels consumption since the beginning of 2016.
India has been encouraging the use of liquefied petroleum gases (LPG) as a cleaner-burning cooking fuel for the past few years by subsidizing its cost and recently launching a program to provide LPG connections to lower-income households in rural areas. LPG consumption, which has made up roughly 11% of total Indian liquid fuels consumption since the beginning of 2016, has not declined since the demonetization announcement. After the end of the limited extension of using old banknotes to purchase cooking fuel cylinders, however, growth in LPG consumption slowed from January through March before accelerating slightly in April.
Consumption of petroleum coke fell year-over-year in January 2017 before returning to and remaining in growth since February. Petroleum coke, used in industrial applications such as cement manufacturing, has constituted, on average, 12% of total liquid fuels consumption in India since the beginning of 2016. Trade press indicates that cement production and demand in India were negatively impacted from cash shortages and may have indirectly affected petroleum coke consumption. However, going forward, petroleum coke consumption may decline because the Supreme Court of India issued an order this year that requires restrictions be placed on the use of petroleum coke in the area surrounding the country's capital due to environmental concerns.
The effects of cash shortages on India's liquid fuels consumption will likely continue to ease. Liquid fuels consumption began to rise at the start of the second quarter of 2017, up 3% in April 2017 compared with the prior year. Money supply is now close to pre-demonetization levels and the International Monetary Fund's Regional Economic Outlook for the Asia Pacific region suggests that India's GDP will begin accelerating in the latter half of 2017.
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