By R. Sasankan

David Ricardo, the British political economist, coined the term comparative advantage. The idea revolves around a simple principle: If a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool. This is even true if that country is the world's best wool producer, since the country will have more of both wool and wine than it would have without trade. Put simply, nations fare better when they focus on producing goods with the lowest production opportunity costs.

Ricardo's theory - first articulated in 1817 -- underlies the concept of free trade that is under assault today as US President Donald Trump winds up the rhetoric on protectionism.

In recent months, especially after the Ukraine crisis, some energy experts have been trumpeting the immense advantages that India derives from its foray into west European countries with its petroleum products. There were media reports that Russia's price- discounted crude was finding its way to Europe as petroleum products through India. These reports must have provided great relief to the ‘'patriotic souls" agonising over the country's growing negative image arising from the import of crude oil, LNG and LPG.

It might be helpful to pause here for a brief overview over the refinery sector that will help elucidate some important aspects of the country's petroleum industry. India's refinery sector includes 23 refineries, with the majority being in the state-sector (PSUs). The top three companies in the sector are Indian Oil Corporation, Bharat Petroleum Corporation, and Reliance Industries (RIL). As of October 2022, India's refining capacity was about 251.2 million tonnes per year which rose to 256.8 million tonnes in 2024. The Indian Oil Corporation is the largest domestic refiner with a capacity of 80.6 million tonnes per year. The Jamnagar Refinery of Reliance Industries Limited (RIL) is the largest refinery in India. The Digboi refinery is the oldest refinery in India, having started operations in 1901.

Europe is increasingly turning out to be the bright spot for oil product exporters from India. India's gasoil exports to Europe reached a high of 282,000 b/d in September 2024 and eased to 215,000 b/d in October. Nearly 104,000 b/d was loaded in November out of Indian ports for Europe.

India's perceived success in petroleum products export has buttressed the arguments of the lobby that wants India's crude refining capacity to be expanded in a big way. S&P Global Commodity Insights estimates India's refining capacity, which now stands at 256.8 million tonnes per annum, will reach about 300 million tonnes by 2028, with 58% of the increase coming from brownfield expansions and the rest, totalling 18 million mt/year, from greenfield projects. Recent media reports suggest that the mega refinery project originally planned at Ratnagiri is now being considered for Gujarat or Andhra Pradesh.

There is little doubt that India's refining capacity will be able to take care of the country's demand for products. But what we need to avoid is the pitfall of creating refining capacity with the aim of exporting petroleum products that bear 95 per cent import content. Shipping cost works out to 4-5 %.That makes no sense at all because there is no upside gain from value addition.

Compare the piffling gains in the petroleum sector with those that textile makers in India make because their value addition is significant since cotton and yarn are locally available. Export of any item makes sense only if there is a significant value addition.

It is true that Reliance Industries has achieved great success from its refineries. But we must not forget the fact that the Indian taxpayer has contributed immensely to this success. RIL reaped huge benefits in the form of virtually tax-free import of equipment for the refineries, a 20-year tax break on profits, and land that was given to them almost free. Dhirubhai Ambani was able to execute his bold vision to establish a complex refinery which could process all sorts of crudes. The RIL refinery can process even the heavy crudes of Venezuela which the US avoids because of environmental reasons. Besides RIL, the PSU refineries, which dominate the domestic refinery sector, were also granted concessions that ultimately cost the taxpayer.

Should India continue to expand its refining capacity with the primary purpose of exports? For a very long time now, value addition at the Indian PSU refineries had turned negative. This is inevitable in an area where the country has no strength of its own: almost all of the crude oil is imported. And this also goes for refining technology and shipping services.

Here is my troubling question: If the bedrock of the refinery sector is taxayers' generosity, what does the taxpayer get in return?

Refineries are among the most toxic industries. Expanding refining capacity could lead to increased greenhouse gas emissions, contributing to climate change, especially if the new refineries primarily process high-carbon crude oil. A focus on refining expansion might hinder India's transition to cleaner energy sources like solar and wind power, deepening the country's dependence on fossil fuels from which it would be hard to extricate itself easily. Such a situation imperils public health and grossly undermines the generosity of the very taxpayers who indirectly bore the costs of the enterprise in the first place.