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Saturday Interview | ‘Oil taxes easiest for revenue’

Oil sector is the highest and easiest way to generate revenue for the Centre as well as state governments.

Vijay Thakur | New Delhi |

RS SHARMA, former Chairman and Managing Director (CMD) of ONGC, has over four decades of experience in banking, finance and treasury operations in India and abroad.

Though primarily a banker, he joined ONGC — a leading upstream Navaratna company engaged in oil production and exploration in India and abroad — in 1988 and handled various key positions.

He was appointed as Director-Finance of ONGC in 2002 and also handled the additional position of Director-Finance of ONGC Videsh Ltd before he was appointed as CMD of ONGC in 2006.

He is also a member of the Institute of Cost Accountants of India and an associate member of the Indian Institute of Bankers. He had been a member of various high-level committees like the Search Committee for Selection of Chairman & Members of Competition Commission of India.

Sharma spoke to VIJAY THAKUR on volatility in the oil sector, its challenges and future.

Excerpts:

Q. The oil sector world over appears to be volatile and is facing tough challenges,especially in the wake of the Covid-19 pandemic.How do you see the future of oil and gas sector in India?

A. The oil sector has been like this only. I have seen much volatility when crude oil was hovering at over USD 100 a barrel. Life goes on and I am not concerned over the recent volatility. The unprecedented situation we faced in the wake of the Covid pandemic seems to be over and the entire world is returning to normalcy except a few countries in the West.

India and China are two high oil consuming nations. In 2020, oil demand in China has gone up by 7 per cent. Situation in India has also improved. Another country where oil demand is high is USA. So I see no worry for the oil sector — we are finding new oil reserves. In India, work is in progress for the 50 million tonne West Coast refinery.

I can foresee that the oil industry would continue to prosper for at least another 20-30 years. There was some fear a decade ago that oil demand would surpass its production, but now we do not see this happening in the near future. Global oil demand was at its peak in 2019, almost 100 million barrels a day. In 2020, it went down by 10 per cent apparently due to Covid. But I am sure oil demand would never touch the 2019 level.

Q. Why do you think oil demand would not touch 2019 level again? Vehicles world over are increasing and so is demand.

A. There are many reasons for it. One, new alternate source of energy is coming up. Two, there is more emphasis on gas consumption. Certainly the oil demand would increase marginally but not like what we saw in 2019. And there is one good comfort for a country like India — we may not see any major hike in crude oil prices.

It might not cross $100 a barrel again in the coming 20-30 years. There would not be any supply problem in the coming years. The US has already become the largest producer of crude oil, and new discoveries in the Middle East are also coming up. Lastly, as I said, oil demand is not going to be very high. Though OPEC tried to artificially reduce the crude oil production, it hardly had any impact.

Q. Government has increased its target for strategic crude oil reserves. You think it is enough for a country like India where nearly 70 per cent of our crude oil demand is met through imported oil?

A. Presently we have 11-12 days strategic reserve, which we are doubling. It is a good step but not enough, especially when we have to depend upon imported oil. Let’s look at China, it has a strategic reserve of 90 days, which they are increasing further. China took advantage of the crude oil drop last year and stacked up their reserves at a very low price. India too has an ambitious plan to increase strategic reserves to 90 days but that will take a long time.

Q. India as a whole has been benefited in the recent past due to drop in crude oil prices in the international market.But the benefit has not been passed on to consumers. They are paying higher than what they were paying when the crude oil price was $120 barrel a day in the international market.Do you think it is the right policy not to pass on the benefit of crude oil drop to end consumers?

A. Oil sector is the highest and easiest way to generate revenue for the Centre as well as state governments. No government – irrespective of its political affiliation – would like to lose this opportunity. The only reason why petroleum products were kept out of GST was to generate revenues for states as well as for the central government.

When they are collecting around 60 per cent tax on petroleum products, why will they opt for 28 per cent tax through GST? Petroleum products would continue to generate the largest revenue for governments. We are facing an unprecedented situation in the wake of the Covid pandemic.

At a time when government revenues have reduced drastically, tax on petroleum products is the easiest way to generate revenue. Due to the pandemic, the government has few options to generate revenue. It also needs to spend money to revive the economy and help people. In the present circumstances, I do not think the government has the luxury to reduce tax on petroleum products.

Further no government would think of bringing petroleum products under GST in near future. In future it may try to bring it under GST by adding a new slab of 40 to 50 per cent through the GST council and by amending the existing GST Act. But GST on petrol and diesel at 28 per cent is unthinkable.

However, gas can be brought under GST at the existing 28 per cent. Union Petroleum Ministry has already recommended twice to the Finance Ministry to bring gas under GST, but Finance Ministry has turned it down for obvious reasons.

Q. The Government of India is targeting electric vehicles. Do you think it will impact the Indian oil industry?

A. This is a correct policy. But still the growth of the electric vehicles (EV) sector is very slow. Presently internal combustion (IC) engine numbers are so high that EVs cannot even meet the incremental demands of IC engines.

I am of the view that demand for IC engines would continue to rise and petrol and diesel vehicles would be ruling the road for another 20-30 years until some transformational change happens. There are several issues with the growth of EVs.

For EVs we need cobalt, lethium, nickel and cadmium, which are in short supply globally. It is not easy to meet the global demands of batteries for EVs. Then there are serious environmental concerns with batteries. Though EVs do not emit any pollutant, disposing of batteries is a serious concern and battery vehicles are not a 100 per cent solution for pollution. India might be able to meet the incremental demands of vehicles through EVs by 2030.

But right now it is hard to predict. Technology makes things happen which were difficult to imagine 10 years ago. Let’s hope we will find some new technology for electric vehicles, which is easily available, more economical and environmentally-friendly.

Q. For a developing country like India,going for a private four-wheel electric vehicle may not be economical. You think instead of private EV cars, the government should stress on promoting short range commercial EVs like erickshaw and two wheelers, which offer value for money and are economical?

A. You are right. EVs are value for money for two wheelers, and short range commercial vehicles. For long range vehicles, whether it is a bus or private cars, EVs cannot replace the internal combustion engine in the coming years. Certainly the government must encourage short range commercial EVs and EV two wheelers. E-rickshaw is an example.

Despite no major support from the government, EV rickshaws have already revolutionised the market. Though I am a bitter critic of Arvind Kejriwal, he has taken very courageous steps and came out with an encouraging EV policy. He announced no-registration charges for electric vehicles in Delhi, other states should follow the same.