Budget 2020: Policy interventions are imperative to make India a self-reliant energy major

Globally, while the fourth quarter of this financial year has seen a steady climb in oil prices, the oil and gas (O&G) market is conscious of downside pressures that loom as new output comes online in Norway and Brazil. With the NDA government, in its second term, all set to present Union Budget 2020, O&G players (in India and overseas) would root for policy interventions to provide the much-needed fillip to the industry.

In the last couple of years, the government has undertaken several forward-looking policy initiatives to drive investments and enhance transparency across the O&G value chain. Hydrocarbon Exploration Licensing Policy (HELP) with Open Acreage Licensing Policy (OALP) was introduced that allows E&P companies flexibility to select blocks of their choice and shift to

the revenue-sharing model from the PSC model. Further, with an aim to boost production from marginal fields, Discovered Small Field (DSF) policy was introduced. Enhancement of City Gas Distribution (CGD) networks is also on the priority list as there has been an increase in the number of Geographical Area (GA) licences in the last two rounds of CGD bidding.

On the fiscal front, recently, the government had slashed the corporate tax rates and gave domestic companies an option to pay income tax at the rate of 22 percent subject to certain conditions. Further, in order to boost the manufacturing sector, the corporate tax rate is further slashed to 15 percent for new manufacturing companies incorporated after October 1, 2019 which commence production before March 31, 2023. Considering the main activities in O&G sector involve the production of oil and gas, refining etc., it is still unclear if O&G companies would be considered as “manufacturing” a product and hence eligible to avail the benefit of the reduced corporate tax rate. An express clarification on this account would be a welcome move and will go a long way in providing certainty to new investors looking at India from an investment perspective.

In the recent past, a lot of investments have been announced in the downstream sector, some of which are already underway, while others are still at the planning stage. Considering that the gestation period for such investments is long, it may not be possible for new investments to commence production before March 2023, as required to avail the reduced rate. Also, some of these investments have been made when the company was set up prior to October 1, 2019. Accordingly, the government could relax such requirements and the deadline for O&G players. A targeted move like this will surely be welcomed by the O&G industry.

Another policy intervention that has been expected for a long time is to bring natural gas under the ambit of GST. If covered under GST, natural gas players would be able to claim a setoff of input tax liability on procurements against onward supplies. In addition, it will also bring uniformity in taxation on fuels across India. Further, covering natural gas under GST purview will drive consumption, which should make the sector attractive for investors.

While projecting natural gas as the next-generation fuel, the government has shown its intent to usher in a gas-based economy. To achieve this, a clear road map should be built focussing on the required gas infrastructure like the development of pipelines, CGD networks, re-gasified Liquefied Natural Gas (R-LNG) etc. An expeditious development of integrated gas infrastructure would help India to cash in on the opportunity to enhance natural gas consumption in the overall primary energy consumption mix of the country.

It is a known fact that India is dependent on imports when it comes to crude oil and gas. Considering the sector’s strategic importance and also that it plays an important role in supporting major flagship programmes of the government, a conscious effort is expected to be made to incentivise the industry by offering suitable incentives in tax laws. This will not only boost India’s GDP, but also save a considerable amount of forex reserves which are currently used to foot import bills, ultimately benefitting the balance of trade and overall economy of the country. It is unlikely for a big bouquet of policy interventions to be offered by the government up front, but a phased implementation clubbed with a clear roadmap for the future would benefit the sector and hopefully transform India into a self-reliant energy major.