The Republic of India (India), the world's sixth largest energy consumer, plans major energy infrastructure investments to keep up with increasing demand--particularly for electric power. India also is the world's third-largest producer of coal, and relies on coal for more than half of its total energy needs.

           India's economic growth is continuing its recovery from a slowdown that took place in 2002, which was mainly attributable to weak demand for manufactured exports and the effects of a drought on agricultural output. Real growth in the country's gross domestic product (GDP) was 4.0% for 2002, surging to 8.2% in 2003 and a projected 6.4% for 2004 and 6.2% for 2005 (the Indian fiscal year for economic statistics begins on April 1.) In addition to strong economic growth, India has made substantial progress toward a reduction of political tensions with Pakistan, restoring trade and travel links, and resuming high-level contacts between the two governments.

           After many years of pursuing economic policies based on import substitution and state ownership of key industries, India's government

embarked on a series of economic reforms in the mid-1990s. The reforms included a relaxation of restrictions on foreign ownership in some sectors, and privatization of some industrial enterprises. After the most recent parliamentary elections, which took place in April and May 2004, a new government led by the Congress party was sworn in under the leadership of Prime Minister Manmohan Singh. While the new government has taken some symbolic steps away from the economic policies of the previous Bharatiya Janata Party (BJP)-led government, such as abolishing the Ministry of Disinvestment, the process of economic reforms is expected to continue, but possibly at a slower pace. In the energy sector, the largest impact has been the abandonment of full privatization of the state-owned petroleum sector, while reforms in the electric utilities sector under the Electricity Act of 2003 are continuing.

           India has implemented a series of policy changes since the mid-1990s to encourage foreign investment. Tariffs on imported capital goods have been lowered, and in some cases eliminated (such as equipment for large scale power generation projects). Restrictions on foreign ownership have been relaxed, though there has been discussion of reinstating a few of them in key sectors. Previously, foreign ownership usually had been limited to a minority ownership stake. Annual foreign direct investment (FDI) in India has hovered in the range of $3-$5 billion over the last several years, compared to roughly $40-$50 billion per year of FDI in China.

           India has had a longstanding territorial dispute with Pakistan over the ownership of Kashmir, which has led to a tense relationship between the two countries since the partition of British India in 1947. After a large-scale mobilization of military forces along their border during most of 2002, tensions eased somewhat late in the year, and both sides pulled back most of their forces from the border in phased withdrawals during 2003. Further confidence-building measures on both sides have taken place since then, and a nuclear "hotline" between the two governments is planned. India's rivalry with Pakistan has direct relevance to the country's energy sector, as it impedes plans for regional natural gas and/or oil pipelines (i.e., from Iran or Central Asia).

           For most of the 1990s, India imported a large quantity of refined products, lacking the refining capacity to keep up with growing demand. In 1999, refinery construction allowed India to close the gap. At the end of 2003, India had a total of 2.1 million bbl/d in refining capacity, an increase of 970,000 bbl/d since 1998. The largest single addition was Reliance Petroleum's huge Jamnagar refinery, which began operation in 1999. It has since reached its full capacity of 540,000 bbl/d. Jamnagar sells its products through three of the state-owned firms, and is in the process of building a retail network of its own, which is expected to include 2,000 retail outlets by the end of 2005.

           Another major downstream infrastructure development is the construction of pipelines being undertaken by Petronet India, a company created by an agreement in 1998 between India's state-owned refineries. This construction is expected to add 500,000 bbl/d to India's current 325,000 bbl/d capacity for pipeline transportation of refined products. Pipelines between refineries and major urban centers are replacing rail cars as the main mode of transportation in India.

           While state firms still control retail gasoline sales, several multinationals have entered the Indian lubricants market, which was deregulated five years ago. Firms such as Shell, ExxonMobil, and Caltex currently hold over one-third of the market. While these operations are relatively small, they are seen as allowing the majors to study the Indian market, establish brand recognition, and prepare for the eventual deregulation of the Indian retail petroleum products sector. Still, a requirement that foreign firms invest at least $400 million before entering the downstream market has served to limit their entry into petroleum products retailing. Shell met this requirement in early 2004, and intends to open a few retail outlets beginning in 2005.

           The Indian government officially ended the Administered Pricing Mechanism (APM) for petroleum product prices in April 2002. Prior to this deregulation, the Indian government had tried to offset the effects of price changes in crude oil by maintaining an Oil Pool Account, which was to build financial reserves when crude oil prices fell and release them back as increased subsidies when crude oil prices rose. In practice, though, the April 2002 reforms have not completely removed government influence on petroleum product prices. Subsidies have been maintained on some products, such as kerosene, which is commonly used as a cooking fuel by low-income households in India. State-owned downstream companies also still must submit proposed price changes to the Ministry of Petroleum and Natural Gas for approval. This has, in practice, limited movements in retail prices in response to fluctuations in world oil prices.

           The previously planned sell off of government stakes in Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) appear unlikely to move forward in the near future. The policy of the new Congress-led government is to avoid most further privatizations of public companies which are making a profit. The new Congress-led government has reportedly been considering a restructuring of state-owned assets in the petroleum sector, which would consolidate IOC, ONGC, HPCL, and BPCL into two vertically-integrated major oil companies. No final decision has yet been made on such a restructuring.

           India is planning to set up a strategic petroleum reserve equal to 15 days of the country's oil consumption. The state-owned refiner Indian Oil Corporation (IOC) is likely to take the lead in the development of the reserve, which would be paid for by the Indian central government by means of a tax on petroleum product sales.