The Indian petroleum sector has witnessed major shifts in policy matters over the last few years with the dismantling of the APM and entry of private players into retail marketing business.

The required effect of these measures was to bring in more transparency, however, not much has changed with the government still in control of product prices.

Budget Measures Excise duty on LNG (liquefied natural gas) has been exempted. Countervailing duty (CVD) exemption to continue. 2% cess levied on all taxes including excise. No credit of cess on motor spirit, high-speed diesel and light diesel oil. Existing exemption on naphtha/LNG used for generating synthetic gas or ammonia for manufacture of Heavy water has been extended to naphtha/LNG for generation of steam. Excise duty on gas stoves with a maximum retail price of Rs 2,000 per unit has been reduced from 16% to 8%.  Budget Impact Excise duty exemption on natural gas is likely to benefit the industry as more power plants and fertilizer capacities are expected switch to natural gas as the source of feedstock. Further, the CVD exemption shall help companies' price imported liquefied natural gas competitively. The 2% educational cess levied on all taxes is likely to impact the prices of diesel and is a negative for the sector as diesel accounts for nearly 40% of the petro-products basket. Further, the credit on cess payable on diesel, motor spirit and light diesel oil shall not be available for the purpose of offsetting against the cess paid on the final products. The reduction of excise duties on gas stoves will result in the overall reduction in prices and therefore more penetration in the rural segment, which could actually lead to higher consumption of liquefied petroleum gas. Service tax being levied on goods transported by road or air is a negative, as it shall increase the costs of the transporters and to that extent discourage use of roads for the purpose of freight. This is all the more negative given that the railways budget has not increased the freight charges.  Sector Outlook All in all, the budget announcements seem a negative for the energy sector, which had anticipated a cut in custom duty and a price band to provide more autonomy to the oil marketing companies. However, the exemption of excise duties on LNG has been a positive for the companies, which are now venturing into the business. Although a setback in the short-term, long-term prospects for the industry are encouraging.  Industry Wish List Currently, the additional depreciation of 15% on plant and machinery is available for additional capacity of 25% or more. However, CII expects this provision to be provided at an additional capacity of 15% in any given year. CII wants aviation turbine fuel (ATF) to be categorized under the declared goods since high levies make the domestic air services uncompetitive. Gas prices should be rationalized and should also be categorized under the declared goods. Currently gas prices are capped at Rs 2,850 per TSCM (thousand standard cubic meters), which is one third of the prices of fuel oil against which it was to be linked. A price band for the oil marketing companies so as to increase prices within the range without seeking prior approval of the government. Custom duty cuts in petrol, diesel and LPG so as to minimize the subsidy burden by reduction in costs at the refinery gate.  Budget over the years Budget 2001-02 Budget 2002-03 Budget 2003-04 Proposal to adhere to the original schedule of APM dismantling 50% cess on petrol and diesel will be utilized for funding road projects including the NHDP CNG to be charged 8% excise duty in line with duty on LPG and kerosene. Excise duty on petrol, which was not levied earlier, to be at 16%. Service tax on vehicle service stations. LNG exempt from CVD. Schedule date for deregulations of petroleum products to be adhered (April 2002) Subsidy on essential commodities notably LPG and kerosene to continue, albeit at a lower rate. This included the freight subsidy to far-flung places. As a result prices of LPG cylinder increased by Rs 40 per cylinder and kerosene by Rs 1.5/litre. Such subsidies to be reduced over a 3-5 year time frame. Cess on crude increased from Rs 900/tonne to Rs 1800/ tonne. Excise duty on kerosene reduced from 8% to 4%. 50p cess on diesel to be levied to fund additional outlays on infrastructure projects. Capital goods imports for LNG (liquefied natural gas) degasification plants customs duty reduced from 25% to 5%. Higher thrust on concrete roads in road projects and lower excise duty on cars and CV's
Key Positives Introduction of a price band will result in limited autonomy to oil companies in pricing of products without prior government approval. Rationalization of tariffs on key petroleum products such as MS (petrol) and gradual phasing out of subsidies is expected to provide a big boost for players in the sector, as it will positively affect marketing margins in the medium term. Approval to acquire oil fields abroad shall help reduce import dependence and at the same time better technology as Indian majors compete in the global arena. Entry of private players in the marketing segment likely to result in high competition and better quality products resulting in benefits to the consumers.		Key Negatives Demand for petroleum products continues to be low while refining capacities are being hiked resulting in surplus products. Only certain products such as aviation turbine fuel (ATF) and LPG have registered better growth Delay in the appointment of the independent petroleum regulator may hamper operational freedom and players will continue to dependent on the government for policy related issues. Sharp spurt in crude prices will have a negative impact on the players' margins in the short term, as product prices have a tendency to increase gradually. Subsidies on LPG and kerosene are likely to play a havoc on oil marketing companies as government extends the phasing out of the subsidies by one more year.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.