It is time to reset the fundamentals

Updated: Jul 11 2014, 14:07pm hrs
It is a balanced Budget with focus on growth and fiscal management in the backdrop of a difficult economic environment. As the FM acknowledged, all onus cannot be put on the first Budget of a new government.

The Budget envisions bringing growth back to 7-8% over the next 3-4 years, encouraging FDI, keeping the CAD at manageable levels and reducing the fiscal deficit to 3% by 2016-17. Oil and gas imports at $164 billion form the single largest component of the CAD. Energy will play a role for the economy to grow at 7-8%. In doing so, domestic energy supply has to play a pivotal role to accelerate growth and bring the huge deficit under control. We welcome the governments vision to increase the usage of PNG and to extend the gas grid in India, effectively doubling the pipeline network by an additional 15,000 km to increase the usage of natural gas.

The viability of the doubling of the gas grid will, however, depend on the health of the E&P sector, the user sectors, and the ability to provide security of supply. Currently, gas only accounts for about 8% of the total primary energy consumption in India against the global average of 24%. To build a gas-based economy, fundamentals need to be reset! Over the last few years, private risk capital in domestic exploration services and infrastructure have considerably declined, leading to reduced activity in the domestic oil and gas sector. This worrying trend can be reversed by providing certainty in this multi-decade long engagementmaintaining sanctity of contracts, fast and enabling decision-making, and following global practices can bring a world of difference in attracting serious investment. Additionally, it is critical to have a line of sight for market fundamentals in terms of freedom to market and price to enable development of already discovered resources of up to 10 trillion cubic feet in India over the next 3-5 years, resulting in imports worth $150 billion being avoided over the life of these fields. Market pricing will also incentivise the much-needed inflow of investments, technologies, services and the development of skills in India to unlock the hydrocarbon potential. Studies have shown that increased revenues to the government alone will take care of the increased subsidy burden to the priority sectors over the next few years. This will ensure the sustainability and efficiency of the sector for producers, importers and consumers. The focus on renewable energy is a move in the right direction and will help bridge the gap through distributed generation to allow greater access to energy in rural areas. Similarly, the spotlight on the infrastructure sector with enabling provisions for fund-raising is a good step.

We welcome the focus on administrative reforms and steps to provide greater certainty on taxes. Broad-basing of tax certainty mechanisms such as roll-back of the APA, advance rulings and Settlement Commission and changes in transfer-pricing laws will go a long way in reducing ambiguity and resultant disputes and litigation. We await clarity through the announced high level committee on retrospective amendments. Extending the investment allowance for the manufacturing sector up to March 2017 and tax holiday for new power plants for 10 years will boost the manufacturing sector in general and the power sector in particular. Further, it was heartening to see that the government intends to take forward major reforms such as DTC and GST.

We now await more policy clarity for the oil and gas sector to usher in the much-needed renaissance in energy for India.

Sashi Mukundan