Fast-Growing Indian Economy Grasps At Its Momentum

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Summary

India's vast and growing population is a valuable asset.

Chronic mismanagement is in the past.

A multi-billion deal with the Russians is important for the Indian economy.

Looking over this year's disorder in the world markets driven by a dramatic crude price dive, followed by an irresistible correction, one would rightfully wonder at which main drivers were behind the forces that rapidly brought us to where we are floating now. India's steadily increasing oil demand is undoubtedly one of them.

Many bikes in India Click to enlarge

(source: bikesindia.org)

Around 20,000,000 new motorbikes sold every month vs. roughly 250,000 new cars clearly reflect the prevailing income standard for the developing middle class along with the potentially attractive market for foreign investment, with BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) keen to book their share among domestic retail fuel suppliers.

Oil production in India plays little role in satisfying its economy's needs. Future discoveries of important amounts of hydrocarbons still remain a fiction. Nevertheless, Indian companies have been traditionally engaged in exploring activities worldwide. The state-run ONGC Videsh, with a portfolio consisting of stakes in 37 oil and gas projects in 17 countries, has reported a net profit boost by 6.3% in the second quarter and a prompt bonus share. The ambitious plans of the government to cut oil imports in half by 2030 are suggesting that the important developments in this camp are likely to be announced in the mid-term.

India is the fourth largest oil importer and a net refined petroleum exporter, favoured by its geographically advantageous whereabouts in the middle of the sea route between the major crude producers in the Middle East and Asia's eventual consuming markets. The plans to build a new $30 billion refinery in the western coast with 60 million tonne capacity were announced recently; stakes to be held by Indian Oil Corporation (50%), Hindustan Petroleum and Bharat Petroleum (25% each).

Positively, the constant inflow of crude is supported by the tanker tracking data.

India oil import in September and October 2016

(Source: tanker tracking data, Bull And Bear Investor's calculations).

The confidence of the state-run firms was strengthened by a change in the rules of oil imports, making the process of acquiring tenders at the spot market less bureaucratic. This forward-looking move of the government is seen in line with the efforts to improve the competitiveness of the well-funded state giants aimed at helping them get rid of the decision-making stiffness and take full advantage of such conditions as present volatility and the proximity of Singapore, a major oil-trading hub.

The deal to sell the modern Essar refinery, the second largest in India, to the Russian-affiliated consortium led by Rosneft (OTC:RNFTF) has seen the bid raising to $13 billion from the initial $5.7 billion due to the counter-offer of the Saudi Arabian Aramco (Private:ARMCO), forcing the Russians into substantial revaluation manifesting the strategic purpose of securing the important asset. The fact that, according to some sources, Indian Prime Minister Narendra Modi and Russian President Vladimir Putin were involved in nursing the agreement shifts the event into the class where the amount paid is not as relevant as the deal's geopolitical importance.

India oil imports in October 2016 by country of origin pie chart Click to enlarge

(Source: tanker tracking data, Bull And Bear Investor's calculations).

Traditionally, Russia had little to do on the Indian energy scene and is not found among India's sources of oil imports. But the picture is changing and both parties seem determined to stretch cooperation ties. Indian companies bought stakes in Russian oilfields.

The generally optimistic view can hardly be spoiled by mentioning the country's high amount of bad debt. Modi's government seems capable of moving the country forward on the way to adapt the inherited archaic society to the dynamic Asian environment. The stakes are high, the risks are low. To be updated soon.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The material presented in this article is provided for informational purposes only and is based upon information that is considered to be reliable.