By Devanshee Dave
The oil and gas sector is considered to be one of the core six industries in India and have influence over almost all the sectors of the Indian economy. Oil prices are roaring up and have recently touched a three-year high crossing $70 per barrel. Further, the production cuts by Russia and OPEC nations are going to hurt India. Thus, the upcoming budget is going to be very important and sensitive for this sector.
Statistics on the oil and natural gas sector
Oil imports in India have hiked dramatically on a year-on-year basis by 27.89 percent amounting to 9.29 billion dollars in October 2017. Also, India’s oil consumption increased by 8.3 percent to 212.7 million tonnes in 2016, against the global consumption growth of 1.5 percent, which apparently has lead India to become the third largest oil consuming nation in the world, only after the U.S and China.
Simultaneously, India is the fourth largest Liquefied Natural Gas (LNG) importer in the world after Japan, South Korea and China, accounting for 5.8 percent of the total global trade. Talking about the domestic LNG consumption, it is anticipated to grow at a CAGR of 16.89 percent by the year 2021. The gas production of India is also expected to reach the level of 90 billion cubic meters (BCM) in 2040 from 21.3 BCM in 2017-18.
The investment scenario of the sector seems quite upward, according to the data of Department of Industrial Policy and Promotion (DIPP), from April 2000 to September 2017, the total Foreign Direct Investment in the petroleum and gas sector has reached to 6.86 billion dollars. (Data source: ibef.org)
Basket of budgetary allocation in the last year
Some of the budgetary allocation for the oil and natural gas sector in the last budget includes the subsidy of Rs. 25,000 crore for the oil sector for 2017-18, including Rs. 2,500 crore for the LPG connection to poor households. The basic customs duty on LNG had also been reduced to 2.5 percent from 5 percent. It’s noted that the slump in the customs duty has attracted the use of LNG, which is much benefited from the environment as it’s a much cleaner fuel than others.
In addition to that, the Finance Minister also proposed to create an integrated public sector “Oil Majors.” That was meant for all the oil PSUs to get integrated so that the risk capacity can be increased amongst the value chain and higher investment decisions can be taken. The FM was found saying that it would also create a better compatibility to compete with global oil and gas giants.
The recent acquisition of 51.1 percent stake in Hindustan Petroleum Corporation of India (HPCL) by the Oil and Natural Gas Corporation (ONGC) can be said a leading step towards Government’s awaited supply chain integration and divestment strategy. Adding to that, the ONGC-HPCL is going to be the largest oil acquisition of India till date, which is also in line with aid government in stemming the fiscal deficit.
The thorny road ahead
The upcoming budget is going to be a challenge for the NDA Government, firstly, as it’s the last full budget before the 2019 General Elections and secondly, due to the economic disadvantage that they have.
However, there exist some rays of improvement. The fiscal deficit is already higher than the targeted one by the RBI, and on the other hand, the oil prices are soaring up day by day, which carry a very good potential to increase the deficit further.
The Government has been taking benefits of lower crude prices and not passing the benefits to the common people by not reducing excise duty on it, as well as not adding it to the basket of GST. Recently OPEC and Russia cut the supply of their crude, which has added one more smudge on the oil prices, another being crude touching to 70 dollars per barrel. The higher the oil prices, the pressure to cut the excise on oil will increase, and that can result in a loss of revenue fro the oil sector.
As per an article of an independent news agency, the cost of importing one barrel of crude was 46.56 dollars in Jun 2017 that soared to 77.22 dollars after the announcement of supply cut on 22nd January this year.
The higher oil prices are obviously going to hurt the pockets of the common people as well, hence, if the Government plans to bring oil and diesel under GST, it can prove to be very beneficial for the common people. If we put petroleum products in the highest slab of GST that is 28 percent and even if we apply additional cess over it, the amount to be paid by people would be must lesser than the current prices, even after paying around 50 percent taxes on petroleum products. Said that, we have to consider the fact that the Indian Government, both at centre and state level, depends highly on the revenue coming from petroleum products and applying GST to that will make them lose the revenue, which they can’t afford, also because, after GST, they have very few sources to generate revenue and the fiscal deficit is also jumping high.
What to expect in the upcoming budget?
With rising crude prices, Government is likely to reduce excise duty on petrol and diesel in the coming budget, the memorandum for the same has been submitted by the Petroleum Ministry to the Finance Ministry. Last time in October 2017, Government had decided to reduce the taxes on petrol and diesel which was Rs. 2 per litre, which coasted the Government to lose Rs. 26,000 crore in a full year. The higher oil prices can also lead Government to increase the subsidy on the cooking gas, that can further add to the capital tighten grip on the Government.
India imports 80 percent of its oil which obviously cost India a handsome amount, thus the coming budget can give encouragement to the domestic production by decreasing cess on the same. That will eventually contribute to the idea of Prime Minister Narendra Modi of reducing dependency on oil imports by 10 percent by 2022.
Featured Image Source: Flickr
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