The ongoing war in West Asia has been described as the biggest ever supply shock for petroleum products and it has sent crude and gas prices soaring. Everybody in the world will have to pay more for fuel, whether in vehicles, kitchens, even electricity (outside India). But the economic pain of the war will not be confined to fuel alone. It is bound to inflict a much bigger disruption because of the critical role of petroleum and petrochemicals in industries.
Almost 90% of India’s registered factories use oil/gas for fuel
Latest ASI data (2023-24) found almost 2 lakh factories that had some output. 80.1% and 8.4% of these factories reported consuming petrol/oil/diesel/lubricants (henceforth oil) and gas as fuel. As is to be expected, the usage varies significantly across sectors. HT has classified various sectors in the ASI database into 15 broad sectors by output produced. While three-fourths of factories across almost all sectors reported consumption of oil as fuel, gas usage was more skewed in certain sectors such as pharma, basic metals, and chemicals (more on this later).
Fuel costs are not very high as a share of overall costs
How much of an inflationary impact is one looking at due to higher fuel costs for factories? India has, until now, increased prices at a much higher rate for industrial fuels than those sold for transport or domestic cooking. Fuel costs (excluding electricity, coal, and other fuels) are not a very large part of input costs for most industries. The highest share (recorded in 2023-24 in the rubber, plastic, other non-metallic mineral products industry) was only 3.3%. This is reassuring at one level, but does not tell the entire story. This is because the petrochemical industrial complex is one of the most critical value chain components for a lot of manufacturing across the world. The ripple effects of higher prices or worse, unavailability of critical inputs for production, could be much larger.
Even a first order impact assessment shows some industries could suffer significantly
HT’s analysis of ASI unit level data shows that crude oil, natural gas, and refinery products (henceforth gas and refinery products) had a much larger share in cost of production when their fuel and non-fuel use was combined, especially for some sectors. This number was 17% in chemicals and chemical products, 6.4% in rubber, plastics, and other non-metallic mineral products; and 3.7% in pharma, medicinal chemical, and botanical products in 2023-24. To be sure, the value of items for which factories gave disaggregated data by item is not the same across industries and the clubbing of inputs could have understated the cost share in the numbers given below.
Disaggregated numbers suggest how second and third order impacts can unfold
The numbers in the previous section may still look small beyond the chemical products sector, but highlight how second and third order impacts can unfold. This can be read from the accompanying chart, which shows a more detailed breakup of the five broad manufacturing sectors where share of gas and refinery products in input is the highest. This chart shows that refinery products are only 6% of reported inputs in plastic products. However, this share is 53% in the manufacture of plastic in primary forms. In other words, while a lot of plastic factories may not use gas and refinery products directly, they definitely need plastics, which is heavily dependent on refinery products. Plastics are key to a lot of other manufacturing in India and the world. Plastics is just one example. On March 24, Reuters reported that brewers were warning of price rise and supply disruptions because gas shortage has hindered glass and aluminium production which is required for making bottle and cans for packing what breweries make. The Wall Street Journal reported on March 25 that Dow will hike North American prices of polyethylene prices by 30 cents per pound in April, instead of the previously announced hike of 15 cents, following a 10 cent hike in March.
he Annual Survey of Industries (ASI), the most detailed database of formal Indian manufacturing. The latest (2023-24) ASI report shows that the factories covered here account for almost two-thirds of India’s manufacturing Gross Value Added (GVA). Here is what it tells us.
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