It’s time for an energy-efficient budget

When the Finance Minister presents his final budget before the 2018 Lok Sabha polls on February 1, containing the rising fuel prices in a politically sensitive year will be a key priority. With international crude prices rising sharply to breach the $70-a- barrel mark and India importing over 80 per cent of the oil it consumes, the country is faced by the twin challenge of containing fiscal deficit as well as maintaining the treasury’s oil revenues. The import bill for FY 2018 is estimated at Rs5 lakh crore and any further rise in crude prices would necessitate tough fiscal measures.

With limited elbow room to tweak taxes, India has its economic fortune closely linked to international oil prices. The Government should take the robust reforms-and- reliefs route to spur oil production and give a big boost to the country’s energy security objectives. Contrary to imported crude, domestic production adds substantial revenues to the Government’s coffers while also creating jobs and having a money multiplier effect on the economy.

The best way forward is to create an eco-system to encourage domestic production and cut down dependence on imports with a sustained, targeted approach. This will be a positive step towards fulfilling Prime Minister Narendra Modi’s vision of reducing dependency on imports by 10% by 2022. It is also the need of the hour as India’s domestic oil and gas production touched a five-year low in 2016-2017, dropping more than 20 per cent to just 68 million tonnes.

The Budget should introduce much-needed reforms that will encourage existing players to immediately invest more, and attract new foreign investments to effectively tap the country’s energy potential.

Firstly, the budget is a great opportunity to create a level playing field for domestic crude producers who have to bear 2% CST while imported crude has no taxes.

Further, the advent of GST and the exclusion of petroleum sector from its purview has meant much higher costs for the domestic oil industry contrary to the stated principle of cost neutrality. While the government has made some positive announcements recently and is making efforts to align states and bring the Petroleum sector under GST, the budget would be the best opportunity to clarify that there will be no GST on royalty and cash calls as has always been the case.

Finally, a crucial concern that is expected to be addressed in this Budget is the issue of Cess. The Industry urgently needs government’s support in regulating the cess regime. The cess on crude oil was introduced as a temporary measure back in 1974 when the Oil Industry (Development) Act provided for its collection to part-fund domestic exploration. Today, 43 years on, cess on domestic crude oil continues long after it has outlived its utility.

Cess was originally levied at Rs 60 per tonne in July 1974 and subsequently revised from time to time. During 2005-06, when crude oil prices rose sharply from an average of $40 per barrel to $60 per barrel, the OID Cess was raised from Rs 1,800 to Rs 2,500 per tonne in March, 2006. The cess incurred by producers is not recoverable from refineries and, thus, forms part of the cost of production of crude oil. Again, when crude shot up to over $100 per barrel in 2012, the rate of cess was increased by the government to Rs 4,500 per tonne, effectively linking the cess rate to prevailing crude oil prices.

Waking to the situation, the Government attempted to give some relief to the industry in the Union budget of February 2016 by connecting cess to an ad valorem regime and making it 20% of the per-barrel cost. But the relief was too little, too late. The 20% cess rate provided limited benefit for a temporary period only till crude oil prices were moderate. Regulation of the Cess is must to spur more confidence and bring in more investment to the sector. As per the industry’s recommendation the Cess should be brought down to 8% from 20% as it will accelerate additional production, investment and much needed job creation.

(Sudhir Mathur is the CEO, Vedanta Cairn Oil & Gas.)

( The views expressed in this article are not those of Fortune India)