- The retail inflation increased in the last one year from 6% to 6.44% and the food inflation from 5.43% to 5.95%, during the same period
- According to International Energy Agency [IEA], India’s dependence on energy import is likely to increase by 55%
- The need of the hour is to rationalize the Oil Industry Development [OID] cess that is being levied on crude oil extracted from Pre-NELP blocks
ABHIMANYU JOON
Two years ago when the world was stuck by COVID pandemic, Prime Minister Narendra Modi has made an appeal for becoming ‘atmanirbhar’. This need to be self-reliant has been realized time and again, be it during the shortage of semiconductors used in microchips or the production of high-end electronic goods such as smart-wearable devices. The objective of Atmanirbhar Bharat Abhiyan is to make the country self-reliant by providing economic stimulus for benefiting businesses, service class and self-employed citizens. The basis of this self-reliance is through expansion of economy, so as to generate sufficient capital for increasing consumption and investment. However, this achievement could be hampered by the rising average inflation rate in India. As per the data released by Ministry of Statistics and Programme Implementation [MoSPI], the retail inflation increased in the last one year from 6% to 6.44% and the food inflation from 5.43% to 5.95%, during the same period.
Transport sector guzzles 18% of total energy consumption in India
Such a scenario is not good for manufacturing or value-addition based industries. Consumers would be compelled to divert majority of their savings in securing food items, rather than spending it on manufactured goods. This would cause worsening of the ongoing slowdown, which is reflected from the data released by the Central government. India’s GDP growth has slowed to the lowest value in the last three quarters to 4.4% due to contraction in manufacturing and reduction in private consumption. The hidden cause behind this situation is the high cost of energy generation. Nearly 80% of India’s energy needs are fulfilled by fossil fuels. According to International Energy Agency [IEA], India’s dependence on energy import is likely to increase by 55%. It is worth mentioning that transport sector contributes 18% of total energy consumption in India, as per the Bureau of Energy Efficiency.
India’s import bill doubled between 2021-22 and 2022-23
According to Petroleum Planning & Analysis Cell [PPAC] of India’s oil ministry, India spent nearly $120 million on petroleum import bill in 2021-22. The point to note is this was the period when second wave of COVID was prevalent, leading to subdued economic activity. Between 2021-22 and 2022-23, India’s import bill doubled. This had a direct impact in terms of rise in price of petrol and diesel to unbearable level. In India, the network of petroleum and gas pipelines is not as extensive as in middle-east or western countries. For the transport of men, material, medical supplies or even energy resource such as coal, road transport is the primary choice. Commercial vehicles such as trucks, buses, agriculture equipments such as tractor, multi-utility vehicles, all are powered by diesel. Most of the local level deliveries of couriers, including food items take place by two-wheeler riders, which use petrol powered vehicles. Slightest increase in price of refined petroleum products leads to magnified inflation to be borne by Indian consumers.
Insufficient domestic production
Higher the dependence on imported crude oil and natural gas, increases outflow of vital foreign exchange that leads to devaluation of national currency, affecting the purchasing power negatively. The reason often cited for India’s higher dependence on imports for its energy needs is insufficient domestic production. As declared by the Ministry of Petroleum and Natural Gas, India’s crude oil production fell by 5.2% and that of natural gas by 8.1% in the year 2021, as the producers extracted less output. This is true but not entirely accurate. In India, post economic reforms of 1991, oil and gas exploration blocks were offered under three categories, Pre-NELP from 1990-1999, NELP [New Exploration and Licensing Policy] and HELP [Hydrocarbon Exploration and Licensing Policy] from 2017 onwards.
Adopting latest technology need of the hour
Nearly 90% of India’s oil and gas production comes from ageing fields that fall under the Pre-NELP regime. The locations range from High Sea off the coast of Mumbai, Krishna-Godavari basin, Brahmaputra valley, Gulf of Khambhat and western Rajasthan. Public sector as well as private sector firms such as ONGC, Oil India and Cairn India have been operating at these locations. In order to continue extracting oil and gas from such wells technologically intensive means are required. These means include 4D sesmic mapping, for doing advance level surveys, airborne full tensor gravity gradiometry, for quick data collection of sub-surface resource, artificial lift, for lifting fluids from deep under surface and improving oil well’s productivity, hydraulic fracturing, for creating conducive flow paths for maximum hydrocarbon production.
GST hits hard oil industry
However, this is where the trouble gets identified. The upstream oil and gas industry faces a skewed scenario as procurement of inputs is subjected to GST up to 12%. Such inputs include rigs, platforms, drilling equipment and tools, which not being manufactured in India, need to be imported. Due to recent customs notification, several items have been removed from the exemption list. This extinguishes the scope to secure the items at concessional rates.
Rationalize fiscal regime for Pre-NELP blocks
It is expected from the government authorities to rationalize the fiscal regime for Pre-NELP blocks that account for over 90% of India’s current domestic production. Out of the total revenue generated from Pre-NELP blocks more than 75% goes as levies in the form of cess, royalty, profit share and corporate tax. Only 20-25% of the revenue is left with companies involved in oil and gas exploration, making it difficult to invest in capital-intensive technologies, for augmenting production.
Lift VAT on domestic crude oil
Under recent favourable initiatives, the government has shifted its stance from profit sharing to revenue sharing, for incentivizing more production from domestic blocks. Also the windfall tax has been reduced to 0%, though it would have been much appreciated had it been removed altogether. This is owing to the fact that any additional duty on Pre-NELP blocks would take the government’s share of revenues to 80%, leaving less than 5% of revenue with production companies. This will erode the amount of investible surplus because the domestic crude oil when sold to refineries is subjected to VAT, which is not applicable on imported crude oil.
Enable capital investment in ageing oil wells
The need of the hour is to rationalize the Oil Industry Development [OID] cess that is being levied on crude oil extracted from Pre-NELP blocks and if permissible it should be exempted, as has been done in case of NELP blocks. At the least, it is expected that this cess should be subsumed under GST provisions, to achieve optimization of taxes. Secondly, the VAT imposed on domestic producers should be removed to bring domestic producers at parity with companies importing crude oil without attracting VAT and selling it to Indian refineries, thereby earning higher profit. The third aspect to be tackled is the contractual obligations enforced on domestic production sharing partners, which need to be finalized keeping in mind the long term life cycle of the oil block, so as to enable capital investment in ageing oil wells.
Such a rationalization is likely to bring down the fiscal burden on producers of Pre-NELP blocks from 70% to 40%. This would provide the oil extraction firms with greater surplus revenue for investment in employing production enhancing technologies. Moreover, improving production from Pre-NELP is pragmatic as from 2014 onwards, 255 oil blocks have been allotted under NLEP regime out of which 106 were relinquished due to operation failures and it takes at least 5 years to achieve sustainable production from a new oil well.
It is highly possible that rationalization of fiscal structure of Pre-NELP blocks could enable greater domestic production of crude oil and natural gas, thereby reducing the import dependence and propelling the nation towards ‘atmanirbharta’ in energy sector.
