With last quarter of FY 2020 battered with the supply-side shock due to COVID-19 and the first three quarters of FY 2020 being stressed due to both, the supply and the demand side shocks, thanks to the Covid induced lockdowns, Budget 2021 will be one of the most important and discussed India budget. Experts and the general population, both are expecting the government to take actions along with the sectors like Healthcare, Infrastructure, welfare and incentive to industries and individuals for investment and growth. Before looking into the expectations and speculations for the new budget, let's look at the major highlights of the Union Budget 2020.
The Union Budget of 2020 was the first full budget of NDA 2.0 government, and with a massive mandate that the ruling coalition gained in the general election 2019, many big bang reforms were expected from the government, and depending upon whom you ask, the ₹ 30 lakh crore budget was either well-balanced or poorly drafted. Some of the major highlights of the same were:
As expected, the proportion of revenue from corporate tax went down, due to the lower corporate taxes announced in H2 of 2020. The proportion of GST collection was also lower than the previous year, which is expected to happen this year as well. This has led to the Central government defaulting on the promise of compensating the states for the shortfall in GST collection. In addition to that, the government’s liabilities on pension and subsidies have been increasing, the Finance Minister will have to keep an eye on that.
Now, as conspicuous as it may be, it is important to reiterate that just a few weeks after the budget was announced, COVID-19 and the lockdowns struck and then the government had to make fresh allotments for MGNREGA, plans of Krishi Rail and Krishi Udaan halted, more distribution of food grains was made and earnings of a significant proportion of the population was jeopardized and only a few companies declared dividends. On top of that, fresh direct cash transfer stressed healthcare sector and extra expenditure on welfare schemes, the Fiscal Deficit of the country went up to ₹ 9.14 lakh crore, of about 115% of the annual target for the financial year 2021. Add to that the expected GDP contraction of around 8-9% in addition to far lower than earlier expected GST collection has put the government is a very tight spot of balancing fiscal prudence with providing impetus to growth and employment. Also, the government is staring at increased bills of welfare program, the cost of COVID-19 vaccination and higher expenditure on infrastructure and health.
Given such precarious state of affairs, everyone in the country, individuals and businesses have their own set of expectations from the government in the upcoming budget. Following some of the expectations and speculations:
Nevertheless, with improving economic activities, and lower cases of COVID-19 and the possible advent of vaccination in the country in early 2021, we would be keeping a watch on the development leading up to the budget and the budget itself with hopeful enthusiasm.
Indian Oil & Gas industry is huge and contributes to 5.2% of global oil demands. India is in the top 5 in the world in terms of refining capacity and India is top 3 in terms of demand growth. Indian Oil Industry is import-dependent as around 85% of consumes oil is imported and around 55% of consumes gas is imported. Indian O&G contributes to 25% of the total Indian Import bill.
This is the situation industry was in when the coronavirus pandemic wreaked havoc around the world. In addition to human life loss, pandemic also causes economic loss to different industries around the world. Oil and Gas was one of the most severely impacted industries. As most of the countries were exercising lockdown to contain the virus, the movement of goods, services, and people completely dried up. As everyone was locked in their homes, the demand for Oil & Gas dried up, and the prices fell drastically. It was estimated that the traffic across the Golden Gate Bridge fell by 71% as compared to a year ago (source: Bridge Spokesperson in Wall Street Journal), while the global aviation industry reported the number of seats for sale was only 1/3 (in May) of those in January. The outcome was drastic that due to the crisis the future contract for May delivery for a barrel of WTI dropped to negative numbers for the first time in history, which means that as holding cost is too high, traders were paying people to take the crude off their hands. Covid pandemic coupled with a price war between Russia and Saudi Arabia severely crashed the oil prices. It became increasingly difficult to continue operations as there was a shortage of workforce as employees were affected by the coronavirus and it was very difficult to follow government guidelines such as social distancing. Many factors impacted the demand for petroleum products, a few of them are stated below.
As the restrictions have been lifted and the economy is slowly recovering, the demand for Oil & Gas is picking up, but the road to recovery will be hard for Oil & Gas Companies. Industry experts believe that it will take some time for demand to reach pre-covid levels. Also, most of India’s crude oil production comes from aging wells that have become less productive over time. India’s crude oil output fell to 32,173 TMT in 2019-20 as against 34,203 TMT a year back, hitting the lowest production level in 18 years The long lead time to begin production from discovered wells coupled with the lack of new oil discoveries has led to a steady decline in oil production in India. The aging of oil fields and a production drop of 15.5% from fields run by private players, 2% from fields under ONGC, and nearly 6% from fields with Oil India led to the decline in overall production. Going forward, the government has to encourage and help the companies in oil exploration so that the industry can attain long term growth. As crude price average is expected to be under control, upstream companies should focus on optimization of technical and overhead costs and they should focus on large-scale digitization to enhance operational efficiency. Midstream companies should also focus on digitization to be future-ready. Oil marketing companies (Downstream) should focus on building supply chain resilience. They should focus on digitalization and optimization of the supply chain. As downstream companies directly interact with end customers, they should invest in creating a contactless experience for customers and it will become the norm post-pandemic. To recover and grow in the long term post-pandemic Oil & Gas companies should revisit their long-term strategy and focus on seeking cost optimization opportunities.