Submitted to: Submitted by:

Ratinder Kaur Alisha Garg

Lecturer MBA-1(B)
5742

School of Management Studies

Punjabi University, Patiala
INTRODUCTION OF BUDGET, 2010
When, on Friday February 26, finance minister Pranab Mukherjee presents the Union Budget
for the financial year that starts on April 1, the first full-fledged budget of the second United
Progressive Alliance government, there will be expectations that he will announce proposals
that would bring down food inflation — the single most important and intractable economic
issue currently facing the country’s rulers. There is every possibility that such expectations
will not be fulfilled, not because the finance minister does not want food inflation to abate.

The fact of the matter is that anyone in his position would have limited leeway and very few
options before him that could expeditiously bring down the prices of commodities such as
sugar, potatoes, milk, edible oil, fruits and vegetables, much as he would like these to. Even
bringing down the inflation rate, which is not the same thing as bringing prices down, will
prove to be a Herculean task despite the comforting assurances that have been made by Prime
Minister Manmohan Singh to the effect that the “worst is over”. In other words, the Budget is
hardly the right place to expect measures that could dampen inflationary expectations. What
then could the proposals in the Budget contain? More of the same?
Mr Mukherjee is not exactly known for his flamboyance. He is reputed to be cautious and
somewhat conservative, although his political predilections are certainly tilted more towards
the left that those of the Prime Minister, his right-hand man, the deputy chairman of the
Planning Commission Montek Singh Ahluwalia or, for that matter, his predecessor in North
Block who now sits in a different part of the same imposing building on Raisina Hill, namely,
Palaniappan Chidambaram.

If any one of the last three named individuals had been in Mr Mukherjee’s shoes in July last
year, it is unlikely that the fiscal deficit as a proportion of the country’s gross domestic
product (GDP) would have been as high as 6.8 per cent of the current financial year. (The
fiscal deficit is the gap between the Central government’s total expenditure and its revenue
receipts plus recoveries of loans and other receipts and GDP is the sum total of the value of
all goods and services produced in the economy in a year.) For 2008-09, Mr Chidambaram
had budgeted for a fiscal deficit of 2.5 per cent of GDP; it instead shot up to six per cent. The
finance minister has set a fiscal deficit target for himself at 5.5 per cent of GDP for the
coming financial year.
One hopes that when Mr Mukherjee presents his Budget, he will provide a more accurate
picture of the deficit. The finance ministry is adept at presenting a rosy picture. This time
round, the base year for calculating national accounts has been changed. In the past, the
bonds issued to public sector oil refining and marketing companies as well as fertiliser
companies have been kept out of the Budget calculations. Hopefully, the finance minister will
make a full disclosure in this regard. He should go a step forward and present an estimate of
the total fiscal deficit of the country by including estimates of deficits of state governments.
This has become all the more important since the report of the 13th Finance Commission is
now with the government and will be presented in Parliament the day before the Budget. (The
Finance Commission recommends to the Union government the manner in which taxes
collected by it are to be distributed among different state governments for a five year period;
its recommendations are invariably accepted.)

Pre-Budget Expectations of All Sectors 2010-11

The expectations from Union Budget 2010-11 are quite low at this point. There is a
consensus that there would be partial withdrawal of the stimulus package implemented in the
previous years. There is also not any major expectation of fiscal consolidation or getting back
to fiscal discipline. Knowing the way the Indian polity works (in a measured manner and if
possible by consensus, unless the situation is catastrophic like in 1991), people on the street
have little expectations from the Budget. This makes us believe that the initial market
reaction to the Budget would be positive, though a few days later our markets could fall in
line with the global markets in terms of direction. Critical issues like labour reforms, pension
reforms, subsidies, etc may need broader political consensus. We expect material
developments on the same, if any, to be outside the budget. Any bold steps taken by the
government will be welcomed by the markets as political willingness is not an issue and this
is just the second budget for the UPA government.

Fiscal Deficit & Withdrawal of Stimulus

We forecast that the FY11 fiscal deficit could fall to 5.8% given strong non-tax revenue
growth (incl 3G auctions), partial rollback of tax rate cuts, the lack of one-off expenditures as
in FY10 and the change in GDP growth mix. The likely surge in the RBI’s profit could play
important role in containing the fiscal deficit. In our view, the significant reduction in deficit,
if carried out, will be a positive for government bonds and for the equity market. A lower
deficit will help the INR, which we expect will appreciate going forward. The Government is
faced with a double-edged sword – fiscal deficit vs growth. We expect it to try to strike a
‘fine balance.’ Key issues that we will be addressed during the Budget 2010-11 could be the
path to fiscal consolidation and supply side measures to control food inflation (monsoon
shortfall continues to have disastrous implications for India). The government's chief
statistician Pronab Sen recently said the wholesale price inflation could cross 10% by end-
March 2010. The Government’s FY11 government borrowing is unlikely to decline sharply
from FY10 levels and hence partial withdrawal of stimulus is expected. The catch here is
bringing down deficit by cutting expenditure means risk to growth & the other alternative is
to increase revenues. India’s stimulus package accounted for less than 1% of the GDP. India
is least exposed to a stimulus roll back. There are many reasons preventing the government
from aggressively withdrawing stimulus measures: India’s nascent growth recovery, the
recovery’s reliance on government spends, and uncertainty about the global recovery.
There are clear signs that the economy is once again on a growth path (IIP, export revival,
GDP etc) and hence we expect rollback of some of the measures announced by the
Government last fiscal. Most likely measures include a hike in excise duties (by 200bp) as
well as service tax (to FY08 levels, from the current 10% back to 12%) as the government
begins withdrawal from stimulus. The withdrawal will be gradual, as highlighted time and
again by the Government so as not to hurt the economic recovery. The Government could
first target sectors like Auto and Cement where the recovery and offtake has been robust.
Customs tariff roll backs, on the other hand, are likely to be more across-the-board. The
service tax rate that was reduced from 12% to 10% is likely to be rolled back in the FY11
budget. And as a precursor to the introduction of GST (goods and services tax), we expect the
service tax to be extended to most services, barring a few.

Government spending to moderate

As fiscal consolidation takes centre-stage, we see slower growth in public expenditure
(relative to FY10). However, overall, the Government will increase absolute allocation to
programs like Bharat Nirman, National Rural Health Mission, National Rural Employment
Guarantee Scheme, Jawaharlal Nehru National Urban Rural Mission, Integrated Child
Development Scheme, Accelerated Power Development and Reform Programme etc.

Divestment
We believe the Finance Minister would place high targets from the PSU sale proceeds. This
will be done in order to bring Fiscal deficit under control that would subsequently ease
upward pressure on interest rates. In FY10, the Government could realize close to Rs. 200 bn
from divestments (including pending issues) and in FY11, divestment proceeds could top Rs.
300 bn.

Personal Tax
For the common man, we expect that Finance Minister may raise the exemption limit in
personal income tax, or the investment limit Under Sec. 80C or reintroduce standard
deduction for salaried people. We believe this could be possible as rocketing prices of food
articles like sugar, pulses and vegetables have been hitting the pockets of a middle class
family very badly.

Rural India
It is widely believed that India was not impacted to the same extent during the financial
crisis, as its rural consumption remained strong. The Government through various schemes,
farm loan waiver and a rise in MSP has put a lot of money in the hand of Rural India which
has gone back to fund consumption growth (2 wheelers, tractors, cement, personal care etc).
We believe that while the Government will continue its emphasis on inclusive growth and
social spending, it will also indirectly try and increase revenue from this segment of the
population. This could be done via a rise in excise duties and service tax, which will impact
Auto, Cement and FMCG companies.

Reforms
On the Reforms front, there have been a number of delays. While the Government has shown
strong action on the divestments front, reforms like GST, DTC, FDI in insurance and retail,
PFRDA, SBI (Amendment), LIC (Amendment), 3G auctions, consolidation of public sector
banks etc are issues that yet need to be implemented. The overhaul of the DTC is likely to be
effective from FY12 onwards. Accordingly, we do not expect any major tweaking in the
direct tax rates (both corporate and individual) in the current budget. However, the
government may lay down the roadmap for implementation of the DTC.
GST - The positive effects of GST introduction is manifold: a likely increase in government
revenues, which will be funded at the cost of the parallel economy, higher investments in the
organized sector, expanding the tax net over goods and services and increased consumption.
It is expected that the policy makers would consider completely phasing out CST in the
before the implementation of GST. The challenges toward a smooth transition to GST regime
include agreement between states and Centre on levy and administration of duties, IT
infrastructure issues and integration of indirect tax administration at Centre and state level.
GST is the most ambitious indirect tax reform in India attempted ever and will create one
“borderless domestic market”. It will tax “consumption” as against “production” which is the
current norm. Successful pan India implementation will add ~1-1.7% to the GDP and will
boost Tax/ GDP ratio. For consumers, incidence of tax will come down in case of
manufactured goods. However, in case of services the incidence and coverage of tax may rise
resulting in higher prices. For Industry, volume growth will accrue as incidence of taxation is
minimized. Also, supply chain efficiencies will accrue as there will be no need for multiple
depots and warehouses. Rollout of GST in Apr 2011 seems more likely as the current
dithering owes to clarity on rate of GST: 12 or 18%?, Revenue Neutral Rate: States need to
be compensated for revenues, States losing their sovereign right to tax goods despite getting
the right to tax services and lack of enabling constitutional amendments and backbone IT
infra for a simultaneous nationwide launch.
Oil sector in India

Overview

The Indian Petroleum industry is one of the oldest in the world, with oil being struck at
Makum near Margherita in Assam in 1867 nine years after Col. Drake's discovery in
Titusville. References to rock-oil as 'shilajatu' are found in the Vedas. Early evidences of oil
seeps were recorded along the banks of the Nampong River in upper Assam, in the 1820s by
British army men and geologists. First Indian oil well at Digboi in 1889. Refining,
transportation, followed with the discovery at Digboi. It is amazing how the oil was
transported in elephant drawn carts across the jungles and then through the waterways to as
far as the Malabar Coast. Seismic surveys were carried out in the 19th century in jungles of
Assam using elephant logistics.

After independence, India didn't lose much time in initiating geological and seismic surveys
in search of oil in the Indian basins. After discoveries in the western sector in Gujarat, the
prevailing attitude of non-cooperation by multinationals necessitated the establishment of
Koyali refinery in the 60s. One after the other major refineries was set up and infrastructure
for distribution of the products expanded at a great pace.

Unique challenges of reaching essential fuel, be it kerosene or LPG to far-flung, logistically

challenging terrains across the vast geography of India was addresssed with amazing
resilience. India's forays into offshore in the 1970's at Aliabet were also very early for a
fledgling industry of a developing country. The bold initiative taken with faith in indigenous
capabilities in an entirely new and technologies challenging area is a tribute to the Indian oil
technologists of the day. But the faith was not misplaced as the oilmen did the country proud
by bringing the Mumbai high to production in a then world record time of 26 months from
the day of discovery.

The industry has come a long way since then. The giant offshore structures, the ultramodern
environment friendly refineries, the high-tech pipeline transportation facilities may appear
dazzling. For nearly fifty years after independence, the oil sector in India has seen the growth
of giant national oil companies in a sheltered environment. A process of transition of the
sector has begun since the mid nineties, from a state of complete protection to the phase of
open competition. The move was inevitable if India had to attract funds and technology from
abroad into our petroleum sector.
The sector in recent years has been characterized by rising consumption of oil products,
declining crude production and low reserve accretion. India remains one of the least-explored
countries in the world, with a well density among the lowest in the world.  With demand for
100 million tonne, India is the fourth largest oil consumption zone in Asia, even though on a
per capita basis the consumption is a mere 0.1 tonne, the lowest in the region- This makes the
prospects of the Indian Oil industry even more exciting.

The years since independence have, however, seen the rapid growth of the upstream and
downstream oil sectors. There has been optimal use of resources for exploration activities and
increasing refining capacity as well as the creation of a vast marketing infrastructure and a
pool of highly trained and skilled manpower. Indigenous crude production has risen to 35
million tonnes per year, an addition of fourteen refineries, an installed capacity of 69 million
tonnes per year and a network of 5000 km of pipelines.  

But with the consumption of hydrocarbons said to increase manifold in the coming decades
(155mmtpa by the end of the 10th plan) the liberalisation, deregulation and reforms in the
petroleum sector is essential for the health and overall growth of our economy.

'With more than a billion people, a structural demographic shift resulting in exploding
consumption expenditure, full deregulation of a 100 m tonne market growing at twice world
averages, India represents one of the most exciting oil markets in the world today' - CLSA
Asia Pacific

As the Indian Economy breaks the shackles of a hindu rate of growth to grow at a pace of 8%
and above, the single biggest beneficiary should be the oil & energy sector. Oil and energy
are most happening sectors of the Indian economy today. PSU Oil Companies were in the
limelight over the past two years for a variety of reasons- first, the companies, then the huge
surge in profits, and recently, the drama over sale of government's stake through public offer.

Consider the following:

Automobile sale have been surging every year. Car sales are up by nearly 30%, heavy &
medium commercial vehicle sales have climbed an even more steep 40%, consumption of
diesel and LPG are on a steep rise.

That should be pretty good news for the industry, which is counting on surging sales and
economic boom to absorb the huge refining capacity that has built up in the country. The
interesting story is that oil products consumption has started picking up in line with the
economic boom, though with a certain lag.

Going forward, we should see much larger pick- up in sales of oil products in line with the
GDP growth rate, feel analysts.

High consumption has meant high profit margins for oil companies, particularly refining
majors like Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation
(BPCL), Indian Oil Corporation (IOC) and a host of other smaller refining companies.

Refining margins are now ruling at their highest levels over the past decade. According to
analysts tracking the sector, refining margins are now at $8 per barrel, one of the highest
levels in many years. And these margins have stayed high despite a rise in prices of crude oil.
For integrated refining & marketing companies, like HPCL, BPCL and IOC, the gains are
even more substantial and their numbers may look very impressive.

However, sentiment for the sector would be significantly impacted by the performance of the
biggest oil company in the country- ONGC .The company is by far the biggest player in the
oil exploration & production sector and has a presence in the refining sector through its arm-
MRPL. As crude prices have held firm in the global markets over the past months, the
company should show good performance for the year. The company should benefit from a
surge in demand in this region.

According to CLSA. "While Asia (excluding, Middle East) accounts for only 10% of oil
production, it accounts for as much as 25% of oil consumption and refining capacity. Oil
consumption in Asia is returning, driven mainly by a surge in Chinese demand over the
shorter term. With most Asian economies on track for a solid recovery, we would expect
demand growth to top 3-4% in the next few years leading to a quick recovery. With Asia
forming 45% of global incremental demand between 2000 and 2010, we expect Asian
refining margins to remain at higher than global averages"

Exploration

India remains one of the least explored regions in the world with a well density of 20 per
10000km2. Of the 26 sedimentary basins, only 6 have been explored so far. The Oil and
Natural Gas Corporation (ONGC) and the Oil India Limited (OIL)- the two upstream public
sector oil companies- in 1981/82 had taken their search to previously unexplored areas.
Number of wells drilled as well as the meter age increased. However current reserve
accretion continues to be low. 

NELP

The government in order to increase exploration activity approved the New Exploration
Licensing Policy (NELP) in March 1997 which would level the playing field in the upstream
sector between private and public sector companies in all fiscal, financial and contractual
matters.  

Salient features of the NELP 

1) There will be no mandatory state participation through ONGC/OIL nor there did any
carry interest of the government. 

2) The two public sector upstream companies would compete for petroleum exploration
licences, instead of the existing system of granting of licences on nomination basis.
The public sector companies will also be able to avail of the fiscal and contract
benefits available to private companies. 

3) Open availability of exploration acreage to provide a continuous window of

opportunity to companies. The acreages will be demarcated on grid system and
pending preparation of the grid, blocks will be carved out for offer. 
 4) Freedom to the contractors for the marketing of crude oil and gas in the domestic
market.

5) Royalty payments at the rate of 12.5% for the on land areas and 10%for the offshore.
Half the royalty of the offshore area will be credited to a hydrocarbon development
fund to fund and promote exploration related study and activity. 

6) To encourage exploration in deepwater and frontier areas royalty will be charged at

half the prevailing rate for normal offshore area, for deep water areas beyond 400m
bathymetry for the first seven years after commencement of commercial production.

7) Prompt action by the Ministry of Petroleum and Natural Gas to sign the PSC's for
exploration blocks.

8) The government to attract private investment in the upstream sector has conducted
regular rounds of bidding. 

Powered by the India Hydrocarbons Vision- 2025 report, which gave priority to a huge push
in exploration efforts, the government has moved into overdrive. As many as 94 blocks have
been given out for exploration under the New Exploration and licensing Policy since April
2000 against just 22 blocks in the preceding 10 years. While ONGC holds 57. 2 per cent of
the total area licensed by the government for oil exploration, Reliance Industries and Oil
India Ltd has grabbed licences covering around 26.6 percent respectively.

Refining

The total installed refining capacity of the 15 refineries in the country at the end of March
1998 was 69.140 million tonnes per annum and the total is expected to go up to 131 mtpa by
the year 2001/02. The expected increase in refining capacity should be sufficient to meet the
growth in petroleum product demand (112 mtpa by the end of the ninth plan) with minimum
level of imports.  

The Sub-group on refining has suggested certain financial incentives for the efficient
functioning of the refining sector and enhancing private sector participation during the Ninth
five year plan period. In order to increase capacity utilisation of the existing refineries, 11
new crude pipelines have been proposed by the Sub-group. 

In addition, there is an urgent need to reduce fuel loss in refineries, which reached a level of
7.1% in 1985/86 and declining marginally to 6.1% in 1996/97. To reduce energy
consumption, projects amounting to Rs 7200 million have been identified, which on
implementation, will achieve a saving of 186000 tonnes per annum (tpa).
PRE BUDGET ANALYSIS OF OIL SECTOR

1. IIM study suggests deregulation of oil sector

28 Dec 2009

NEW DELHI: An Indian Institute of Management (IIM), Ahmedabad, study on the oil
sector has suggested radical reforms, including complete deregulation, where private and
public sector firms are free to price fuel as they deem fit.
"Reform of the oil sector is long overdue. The problems in the sector emanate from the
structure of central taxes and the system of subsidisation through prices," the study said.

Currently, the government controls prices of petrol, diesel, domestic LPG and kerosene and
compensates public sector firms through a complex mechanism that has squeezed out
liquidity with the retailers and drained resources of upstream firms.

It gives oil bonds to make up for a part of the revenue lost on selling fuel below cost and asks
upstream operators like ONGC to bear the rest. "The social and fiscal costs arising out of the
current method of subsidisation, and taxation are very severe," it said

Suggesting radical reforms, the study said, "Complete deregulation of the sector allowing oil
producers, oil refiners, marketing companies, and integrated operators to price their products
as they deem fit" is needed.

It said the fiscal costs were very large and much larger than that reported in the budget since
they do not include the costs of diversion and tax avoidance that result from differential
pricing. "Thus in the case of kerosene the cost of delivering Rs 2000 crore to the BPL
consumers was in excess of Rs 24,000 crore."
 2. What Pranab will not say in his budget...
15 Feb 2010

NEW DELHI: I rise to present the budget for 2010-11. Historically, budgets have had
massive fiddles to cloak the true fiscal deficit-by pushing
the government’s own borrowing requirements into the
books of oil marketing companies, fertiliser companies and
the Food Corporation of India. Smoke and mirrors was used
by my predecessor to claim that he would cut fiscal deficit
to 2.5% of GDP in his 2008-09 budgets.

In fact, the hidden borrowing requirements added up to

another 2% of GDP. Let me confess that my last budget
used the same smoke and mirrors, despite which it projected
a fiscal deficit of 6.8% of GDP. But from now on, the
budget will itself provide in full for all the subsidies dished out by public sector corporations.

The Fiscal Responsibility and Budget Management (FRBM) targets will be revised in the
light of our new transparent procedure, and will also be harmonised with business cycles,
something that was never done earlier. This means we will run higher deficits in a recession,
and aim at a budget surplus in the best years. Good years are coming, so we will aim at a
budget surplus within five years.

We have for decades been giving huge, open-ended and unwarranted subsidies for petroleum
products and fertilisers. This will end forthwith. Oil and fertiliser companies will be freed
from price control. There can be no case for subsidising the consumption of petroleum
products, given that they are imported; they will rise enormously in price in the coming years,
and are major sources of carbon emission (which we have pledged to reduce). Fertilisers too
are carbon-intensive.

In future, there will be no subsidy for petroleum products. In place of kerosene subsidy, we
will give solar or LED lamps to poor people in areas that don’t get electricity. And those
getting LPG cylinders should switch to piped natural gas. Cylinders should be limited to rural
areas where piped gas may not be available.

For years, we have had hypocritical talk of inclusive growth while financing schemes that do
not reach the needy. Removal of price control on oil and fertilisers will yield bumper profits
for public sector companies in oil, gas and fertilisers, which will be transferred to the budget
in the form of special dividends.

This revenue bonanza will finance vouchers to families below the poverty line to buy
essential items. Additional sums for inclusive programmes will come from rapid economic
growth and GST reform.

Armed with this extra revenue, we shall substitute cash transfers for subsidies. We will
abolish food subsidy. Instead we will give vouchers to poor people to buy food and fuel items
of their choice from regular shops. This will end the current rampant diversion of PDS
supplies from traders into the open market.

We shall issue education vouchers to people who wish to send their children to private
schools, and not to government schools that are substandard. Similarly, we shall issue health
vouchers. The new Unique Identification Number scheme will be harnessed to ensure proper
delivery of benefits to beneficiaries.

A recent paper by Ramesh Ramnathan shows that different agencies have different
definitions of BPL families, and only 6% of Bangalore BPL families are common to all
definitions. The food and civil supplies department estimates BPL families at 106% of the
whole population of Bangalore! This chicanery must end. I propose to appoint a committee
for identification of BPL families.

Disinvestment of public sector undertakings will fetch Rs 50,000 crore this year. Till now we
have refused to privatise profit-making PSUs. That will end, and we will in the next four
years privatise all public sector corporations, save a few truly strategic ones such as State
Bank of India and Nuclear Power Corporation of India.

3. Budget 2010: Oil & Gas industry awaits impetus for

accelerated growth
19 Feb 2010

The Indian economy has survived the global recession with marginal decline in its economic
growth. This has largely been the result of a combination of prudent fiscal and monetary
policies. The energy demands of the nation coupled with inflationary trends and volatile
crude prices has thrust upon the Government a tough task of striking balance.

Amidst all this, the Budget Session is here again! It’s the time of the year when industry
optimism surfaces and expectations take the front seat. The Oil & Gas Industry is no
exception. The sector is eagerly looking forward to immense impetus for increasing
investment levels and accelerating the pace of its development.

Budget 2009 brought about a new twist to the issue of availability of tax holiday for natural
gas production. In 2008, it was proposed to keep natural gas outside the purview of tax
holiday. Now, the holiday is extended to commercial production of natural gas, provided the
blocks are licensed under the 8th Round of the New Exploration Licensing Policy (NELP –
VIII).

The pre-NELP blocks and those licensed under NELP I to VII Rounds stand to lose heavily
on account of their exclusion from the tax holiday regime. Regardless of the specific tax
holiday commitments in the Production Sharing Contracts, such treatment has not been taken
well by the Exploration and Production (E&P) players and the industry is awaiting a
resolution on the matter.

Closely linked to this, is the issue of claiming the tax holiday for a period of seven years,
starting from the commencement of commercial production. The basic nature of the upstream
industry is capital intensive with long gestation periods and high risks. Practically, due to
substantial initial costs and existing tax laws, E&P players are hardly ever able to claim the
tax holiday for the entire duration. Flexibility in the period of claiming the tax holiday,
similar to the infrastructure sectors, as well as, abolition of Minimum Alternate Tax during
the holiday period would help industry players enjoy the true benefits of the provisions.

E&P players continue to suffer due to service tax leakages. While, E&P companies are
paying input service tax, they have no output service tax or excise duty liability against
which, they can claim credit. Some of them are even paying crude oil cess which is not
creditable, although, it is a federal indirect tax levy. Means to address this issue has been a
long-standing demand of the players to reduce their ever-increasing cost burden.

Investment linked tax incentive scheme available for undertakings engaged in the business of
cross-country natural gas distribution network seems to defeat the purpose of incentivizing
investors. The downstream players will hardly benefit from the scheme given that there
would be no significant profits in the initial years.

The industry calls for a reintroduction of the tax holiday provisions and extension of the
holiday to City Gas Distribution (CGD) networks. Availability of tax holidays would be an
added stimulus to the private players to invest in setting up CGD networks which entail
massive investments and have long payback periods.

Undoubtedly, natural gas is the fuel of the future. Enough representation has been made to
provide fiscal stimulus for the development of natural gas by granting it ‘declared goods’
status, but without success. Natural gas, unlike its peers, coal and crude oil, is subject to high
and multi-point sales tax, ranging from 8 to 20 percent. The ‘declared goods’ status would
ensure that it attracts a uniform state sales tax not exceeding 4 percent providing natural gas a
more competitive edge in the energy segment.

4. Pre-Budget expectations of oil & gas sector

22 Feb 2010 

PETROLEUM BAZAAR  

Although the last year witnessed the global economic meltdown impacting major economies
of the world, the Indian economy largely withstood it. The oil & gas industry has been
instrumental in sustaining the growth rate of the Indian economy. The petroleum & natural
gas sector—which includes transportation, refining and marketing of petroleum products and
gas—constitutes over 15% of the country’s GDP.

Other than this, it also acted as a critical element in propelling other sectors of the economy.
Financial year 2009-10 has been a landmark one for additional production of oil & gas in
India.

Commencement of crude oil production by Cairn Energy in Rajasthan, large oil discoveries
by Reliance in the Krishna-Godavari basin and improved oil recovery projects by oil
companies have supported the growth to a larger extent. The increased production will help
reduce the country’s oil imports, saving foreign exchange and leading to higher economic
development and an increase in the GDP growth rate. India's domestic demand for oil & gas
is on the rise. According to the petroleum ministry, demand for oil & gas is likely to increase
from 186.54 million tonnes of oil equivalent (mmtoe) in 2009-10 to 233.58 mmtoe in 2011-
12. With Nelp-VIII, the overall number of blocks brought under exploration has exceeded
200, enhancing the oil production.

The development of the oil & gas sector leads to energy security, employment and welfare of
the community. With the Budget around the corner, the sector looks forward to fiscal
incentives that would boost the sector’s capital outlay. This can extend to the hitherto
untapped areas and also to those areas that have a lower probability of striking oil reserves.

In addition to the optimisation of tax holiday by providing flexibility to claim it in a block of

10-15 years, a weighted deduction of, say, 150% of the actual expenses incurred in respect of
exploratory cost should be provided. Further, the tax holiday available for profits from the
production of natural gas from Nelp-VIII blocks should be extended to pre-Nelp and CBM
blocks.

The industry hopes that the application of MAT provisions would be suspended during the
tax holiday period.

The longstanding demand for the removal of the service tax on the services utilised by E&P
companies needs to be addressed. The service tax is imposed on the input used by E&P
companies, but since there is no output service tax or excise duty liability against which they
can claim credit, this increases the cost burden.

The industry looks forward to the declared goods status for natural gas. It would apply a
lower sales tax rate on industrial goods, as against the present prevalent rate that varies from
state to state between 12.5% and 20%, except in Rajasthan where 4% tax is levied.

Looking at the volatile trend of crude oil prices and under-recoveries made by oil marketing
companies (OMCs), the time is ripe for the government to take the right move in the sector.
More so in light of the Parikh Committee report that has recommended deregulation in the
pricing of transport fuel. Given the impact on inflation deregulation might have, it would
have to be blunted by the right set of monetary policies.
POST BUDGET ANALYSIS OF OIL SECTOR

A Week: - Post Budget and Expiry

All the announcements, expectations and heading have come to an end. The ball now lies in
the court of investors who are now ready to make fresh buys and investments. A limelight of
budget was increase in excise duty, reduction in surcharge, disinvestment plans, lowering of
fiscal deficit and the most important was the Tax slab. Progressing further with its
disinvestment drive, the government has estimated to raise Rs 40000 crore from
disinvestment in the year ended March 2011. It has also estimated Rs 35000 crore from sale
of third generation telecom auctions.

Finance Minister has done a very tactful job of making everybody happy. Kudos to him. The
only concern remains is the increasing Food Inflation. A hike in Fuel prices may increase it
further in short run but it will gradually settle down since it is more from supply side.

The coming week will mainly be dominated by the post Budget reactions and more by
domestic investors as compared to FII’s. Auto Industries have already passed the hike, raising
the prices of cars and commercial vehicles but with income bracket increasing the demand is
bound to increase. So be positive on Stocks such as Tata Motors, M&M, Hero Honda and
Maruti. Tata motors can even test 825 levels and M&M can been seen back at its 1130 levels.

IT sector remains lucrative again with fresh buying seeing in it. The surcharge will be a great
booster for this sector. Buy Infosys with target of 2700 and TCS can be seen around 800
levels.

A thrust on the infrastructure sector also augurs well from a long-term growth perspective.
The Finance Minister has provided Rs 1.73 lakh crore for infrastructure development in
2010-2011, which accounts for over 46% of the total plan expenditure for the year. So surges
in ACC, Grasim, JP and Reliance Infrastructure can be expected.

Oil and Natural Gas sector will be volatile. This sector may even underperform sensex or a
rise less than sensex can be expected.
With NBFC’s given Banking License, this segment will drive the market in next coming
months. Expect IFCI to test 65 levels and IDBI bank at 145 levels. SBI is bound to regain its
2100 resistance in near future.

1. Budget 2010: Baby steps towards oil sector reforms

27 Feb 2010

The petroleum sector, for long, a ward of the government, may be seeing light at the end of
the tunnel on reforms with the increase in customs and excise duty on crude and petroleum
products. But it may well turn out to be a mirage, given the opposition from rival parties and
some within the ruling coalition.

“There are clear-cut signs of deregulation in the auto fuel sector, which will have a positive
impact on private sector marketing companies,” said Naresh Nayyar, MD and CEO of Essar
Oil, a victim of the government’s subsidised fuel policy.

Pranab Mukherjee said he was restoring the basic duty of 5% on crude petroleum, 7.5% on
diesel and petrol and 10% on other refined products. He also enhanced the central excise duty
on petrol and diesel by Re 1 per litre. Petrol prices will rise by Rs 2.71 a litre and diesel by Rs
2.55. Opposition parties walked out of Parliament in protest.

Another indication that the government is moving towards reforming the sector is that it cut
subsidy on petroleum products to Rs 3,108 crore next fiscal, from Rs 14,954 crore this year.
Probably, Mr Mukherjee is \factoring in the subsidy for the poor man’s fuel — kerosene —
and not for petrol and diesel mostly used by the affluent.

While a section of the industry is taking the levy of taxes as a reform measure, some say it
may be just a way to enhance revenues. Also, the payment of subsidies in cash instead of oil
bonds has led to the belief that the government may have no option but to let oil companies
raise prices in line with international crude oil prices, if they have to survive. Crude prices
have more than doubled in the past year, but are off their all-time highs.

While the imposition of duties will fetch the government revenue of Rs 18,680 crore, it
would hardly address the chronic problem of oil marketing companies (OMCs) such as
Indian Oil and Hindustan Petroleum, which bleed due to subsidies. These companies, which
in the past had contributed as much as 25% of tax receipts, may report a loss of Rs 45,000
crore this fiscal.

“Prices of fuel will go up, but this will not help the oil companies or reduce their losses as the
price rise is due to higher levy,” a marketing official at IOC said.

The government will be left with no option, but to free pump prices of petrol and diesel, said
a senior oil ministry official who did not want to be identified.

The finance ministry budgeted Rs 12,000 crore as cash compensation for the three state-
owned OMCs for 2009-10 against their demand of Rs 31,000 crore, just for selling cooking
fuel below cost.

The taxes may have been raised, but the reform could be a long way off. “I am not the only
one who has to decide (on reform)... we have to consult a lot of others,” petroleum minister
Murli Deora told reporters.

2. Budget 2010: Aam admi cries, so do oil companies

27 Feb 2010

By the time you read this, petrol prices would in all likelihood have gone up by over Rs 2.70
a litre and diesel by Rs 2.55 as the FM played ducks and drakes with customs and excise
duties on motor fuels. This practically bushwhacked a chance of giving state-run oil
marketers at least some freedom to decide pump prices in line with international markets.

An increase in prices was expected after the Budget as part of what was anticipated to be at
least a partial deregulation.

The revised prices would have shored up the sagging bottom lines of state-run oil marketers,
some of whom are facing bankruptcy due to mounting losses from selling fuels at
government-capped prices. The government too would have benefited through the
incremental increase in the variable tax components in fuel prices.

The Budget may have created the ground for a political roadblock in the way of deregulation
by raising customs on petrol and diesel from 2.5% to 7.5%, restoring 5% import duty on
crude and increasing excise by Re 1 a litre.

The net impact of the move will actually push up motor fuel prices by almost Rs 3 a litre due
to the impact of the budget rejig and the incremental increase in local taxes.

After such a steep increase, it appears politically impossible for the oil ministry to push for
pricing reforms in line with the Kirit Parikh panel’s recommendations since that would entail
another increase in excess of Rs 4 a litre for petrol and more than Rs 2 for diesel in a free
market regime.

Essentially then, it is back to haggling for dole for oil minister Murli Deora unless he musters
the courage to raise prices by at least another rupee or so in tandem with the duty rejig — and
give it a guise of limited pricing freedom.

Dole, too, should not be a problem for the FM since he can hand back some of the Rs 26,000
crore he will mop up from the petro duty rejig to keep state oil marketers afloat.

This, some expect, is the only option left for Deora’s ministry. No wonder, despite being
unhappy with the duty hikes, they still see a ray of hope for reforms. Essar Oil CEO Naresh
Nayyar told the Times of India, "The changes in the duty will have some negative impact on
the profitability of the domestic refineries. However, there are clear-cut signs of a move
towards deregulation in the automobile fuel sector which is expected to have a positive
impact on private sector marketing companies."

The restoration of customs on crude will also adversely impact private refiners such as
Reliance Industries and Essar Oil as their input costs will go up. Beyond the duty rejig, the
increase in MAT to 18% will also hurt exploration firms and other companies that are
implementing big projects during their tax holiday period.

3. Fuel price hike rollback will be –ve for oil sector:

Udayan
02 march 2010

CNBC-TV18

The oil and gas industry was keenly awaiting the Union Budget as it expected deregulation
and an in increase in fuel and gas prices. There were hopes that some of the recommendations
made by the Kirit Parikh committee would see light of the day. However, no such measures
were announced in the Budget.

The Finance Minister has also increased the Minimum Alternate Tax to 18% from the earlier
15%. Oil exploration and production companies had sought an exemption from MAT. At
present, 15% MAT is applicable on booked profits (16.995% effective).

No exemption has been granted on profits earned from commercial production or refining of
mineral oil which are otherwise fully exempted from income tax for the period of seven years
from the levy of MAT.

The Budget was not very kind to the oil space. There is talk of a rollback etc—I do not know
whether that will happen because if it does it will be quite negative and not just forthe oil
sector. It will be constitute as a fairly negative kind of move. But we have discussed how the
excise and customs duty are negative offset by the price hike. Therefore the ability of the
government to do anything more significant by the way of price hikes any time soon or
implement the Kirit Parikh recommendation given the resistance to the current oil price hike
already seems like it is an alleviated risk and therefore if you were a betting man you would
not bet on further reforms or any price hikes in the oil sector any time soon.

It is conceivable that the oil marketing space turns a bit of an underperforming space right
now after what came through in the Budget and even the larger companies have MAT to bear
with—increase MAT for Reliance Industries, Cairn etc—so the more you look at it, it seems
unlikely that the oil space will outperform right now. So mild underperformance given what
came through is more like on the cards.