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Can India break the new Hindu growth rate? - Views on News from Equitymaster
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  • Mar 17, 2001

    Can India break the new Hindu growth rate?

    The recent budget was a mixed bag for the energy sector. Although the Finance Minister re-iterated the Government’s resolve to adhere to the original petroleum marketing deregulation schedule, he increased the excise duty rates on diesel, petrol and compressed natural gas.

    For the energy sector fiscal 2001 and has not been anything to write home about. Crude oil prices which, started their trek in March 1999 climbed all the way to the ten year peak of $35 per barrel before they could subside. These sky high feedstock prices cut into the operating margins for the sector and consequently, companies are expected to report lower earnings in the current fiscal. In addition to high feedstock prices, growth in the sector as compared to earlier years has been quiet dismal. In fact, as per the regulatory authority, Oil Co-ordination Committee, fiscal 2001 is expected to show nil growth in consumption of petroleum products. However, other economy monitoring agencies put the figure at 2.6%. This too is low when compared to the CAGR growth of 6% over the last five years.

    In light of the poor domestic demand the Indian companies have had to resort to exporting their surplus production. India, which was the largest buyer of diesel has now started exporting diesel and petrol from the current fiscal, earning crucial foreign exchange for the country. The current refining capacity in the country stands at 114 MMTPA (million metric tones per annum), which is expected to increase to 162 MMTPA by 2007. The demand on the other hand is estimated to grow to 150 MMTPA over this period. Therefore, India will continue to remain in surplus and will need to export to ensure balancing of demand and supply. Such a scenario though does not augur very well for the domestic refining industry. In the case these capacities materialize the excess production will put pressure on the realizations of refiners.

    An important development in the sector recently has been the decanalisation on crude imports for PSU oil companies. The government had earlier permitted the private sector to source their own crude. However, PSU companies had to source their crude through Indian Oil (IOC). The new arrangement is expected to bring down procurement costs as the tenders will not impact the demand supply situation in the markets thus leaving prices neutral. Also, the dollar purchases will be significantly lower and not impact the exchange rates.

    The anticipated deregulation in petroleum marketing by 2002 is also an important event in the overall dynamics of the industry. Such a development will impact the visibility of the future industry scenario. Opening up the sector to global competition will see the entry of international majors. New entrants are required to invest in exploration & production, refining or transportation infrastructure before they are allowed in the lucrative marketing segment. To face the new industry scenario the first round of consolidation has already begun with public sector (PSU) stand alone refineries being merged with refining and marketing companies. Hence, there may not be any stand alone refineries as marketing infrastructure will hold greater bargaining power. This is one of the major reasons why global companies will be keen contenders in the disinvestment proceedings of oil PSUs. Also, they could be lobbying for this cause.

    Despite, the various permutations and combinations on the future industry scenario the possible demand growth continues to look attractive. Numbers have caused grief to many a MNC, however, India still is one of the lowest consumers of petroleum products. The per capita consumption of petroleum products in India stands at 98 kilograms (kgs) while that of China and the rest of the world is at 165 Kgs and 585 Kgs respectively. The consumer-wise break-up of the petroleum industry indicates the close co-relationship to the economy. The key consuming industries include power, shipping, cement, iron & steel, petrochemicals and fertilizers most of which form the core sector. A large part of the sales is also through the retail segment but this would include the transportation sector. Also, growth in passenger vehicles segment will impact the off-take of petroleum products. Therefore, the energy sector seems linked to the performance of core industries.

    It is imperative, therefore, that if India is to match China’s per capita numbers then the country will need to break the barrier of 6% GDP growth, which it is unable to overcome in the last few years. As a result the core sector will need to provide the much needed impetus for this future growth. The energy sector seems to be a play on the Indian economy. If one is a believer in the Indian growth story then the time seems to be near to fill up the tanks and enjoy the ride.



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