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Budget 2019: Unlikely to be progressive for oil & gas sector as fiscal math frail

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The oil and gas sector has witnessed several reforms over the past few years such as Open Acreage Licensing Policy, Hydrocarbon Exploration Licensing Policy, change in under recovery sharing mechanism, dynamic pricing of products. Nevertheless, there are several impediments to boosting the oil and gas production, operational efficiency and competitiveness of the sector, removal and resolution of which have been the recurring demand of the industry incumbents.

In the upstream sector, one of the prominent demands of the industry has been the exemption of exploration activity from the levy of GST as this is a non-revenue generating activity. Moreover, the main products of the exploration & production (E&P) sector viz crude oil and natural gas are outside the purview of GST, making the process of getting input tax credit difficult. However, given the shortfall in GST collections, the government of India (GoI) is not expected to provide these concessions.

Additionally, the upstream sector has been demanding rationalization of cess, which currently stands at an ad-valorem rate of 20 percent and sweeps away a substantial part of the upside at higher crude oil prices, thereby, disincentivizing exploration and production. However, given the falling oil and gas production, as well as, moderate energy prices, the likelihood of this demand being met seems remote.

The industry has been demanding that the government consider reducing the minimum alternate tax (MAT) rate for exploration and production operations, which at about 20 percent of book profits is a significant deterrent for investment. The government of India should also clarify the eligibility to avail tax holiday under Section 80-IB of the Act and that the definition of 'mineral oil' that would include natural gas retrospectively, which has been a long-running demand of the industry.

Additionally, in order to rationalize the tax structure, the industry has been demanding that petroleum products viz. crude oil, natural gas, aviation turbine fuel (ATF), motor spirit (MS) and high speed diesel (HSD) be brought under GST to enable a free flow of credits and avoid stranded taxes. However, this reform would need strong political will and building consensus among the states and Centre and it would not be possible with general elections just around the corner.

In order to promote the use of natural gas as fuel, Liquified Natural Gas (LNG) imports should be exempt from customs duty as crude attracts nil duty whereas LNG attracts 2.5 percent duty. Similarly, to encourage more natural gas consumption, the levy of GST on transmission charges should be exempted.

The Finance Act, 2016, has inserted a sunset clause in section 80-IB(9) of the Act to provide that no deduction shall be allowable to an undertaking that begins commercial production of mineral oil after April 1, 2017. As discoveries in blocks take a long time, the withdrawal of deduction for the assessees commencing commercial production after April 1, 2017 will put investors of the blocks to a disadvantage. Accordingly, the industry has been demanding that the sunset clause should relate to the acquisition of new blocks after April 1, 2017, and not those commencing commercial production on the said date.

The benefit of deduction under section 35AD may also be extended to city gas distribution entities to encourage higher investment in city gas distribution business. Currently, a deduction under section 35AD of the Act in respect of capital expenditure is allowed for laying and operating a cross country natural gas or crude or petroleum oil pipeline network for distribution.

To promote gas as a fuel, removing hurdles of infrastructure and levies is necessary. Setting up of a gas trading hub should be prioritised. However, with strong resistance, divergent views of several industry incumbents and several conditions precedent, implementation of the same seems remote.

ICRA expects the subsidy requirements for under recoveries to remain high considering moderately high crude oil prices, increasingly active management of production by OPEC and others, high dependence on crude imports and depreciation of rupee vis-a-vis the dollar.

Nonetheless, actual subsidy allocation could fall short of requirements as the pressure on fiscal is apparent. Also, with the pressure on government finances, the target for revenues from disinvestment is expected to remain high which may lead to sale/consolidation of oil sector PSU, large dividend payouts, and share buy backs.

Budget 2019: Modinomics did not do enough in boosting startups

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Prime Minister Narendra Modi launched the “Start-Up India” programme in 2016, offering tax breaks, funding options and easier procedures to aid fledgling start-ups.

The signature initiative was intended to build “a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities”.

“The Government through this initiative aims to empower startups to grow through innovation and design,” it said.

The 19-Point Startup India Action Plan envisages several incubation centres, easier patent filing, tax exemptions, ease of setting-up of business, a Rs 10,000 Crore corpus fund, and a faster exit mechanism, among others.

For being eligible for tax exemptions for three, a startup’s turnover should be less than Rs 25 crores in any of the previous financial years.

Under the scheme, an entity shall be considered as a startup up to seven years from the date of its incorporation or 10 years in case of startups in the bio technology sector.

The move, however, had faced criticism as three-year tax breaks have not yielded benefits given that small-bore, innovative ventures struggle for several years before breaking even.

Startups and investors are also crying foul over a tough taxation climate in India.

The biggest bone of contention is the so-called `Angel Tax’, which is levied on startups who are raising money from in terms of equity issuance from friends, family and angel investors. It is regarded as taxable income, from other sources.

Angel tax was introduced in the 2012 finance bill aimed at tackling money laundering by investors. Startup entrepreneurs, however, say that this results to an effective taxation rate of 30 percent, and makes it difficult for them to raise funds.

Around 350-400 startups raise angel funding every year and the tax is impacting most of them. The government has allowed tax concession if the total investment did not exceed Rs 10 crore and have said that it will look into the issue again.

The government’s decision last week barring online retailers such as Flipkart and Amazon from selling products of companies in which they own stakes, need to be seen in this context.

The new rules stipulate that such companies will also not be allowed to offer cashback schemes to charm customers to shop at their online market places.

Online retailers will also not be allowed to strike exclusive deals to promote brands through flash/festive season sales.

The new rules, which will come into effect from February 1, 2019, are aimed at levelling the field among online and offline retailers. Offline retailers have been lobbying with the government that online marketplaces, flush with foreign money, are driving brick-and-mortar stores out of business.

Offline retailers say e-tailers such as Amazon and Flipkart were adopting “discriminatory” and “predatory” pricing to attract customers by offering deep discounts. Smartphone flash sales, and festive season sales of fashion and electronic products were examples of such destructive pricing.

E-tailers get into exclusive tie-ups for deep discounts with brands and also push products of preferred vendors which they partly own or have preferential contracts.

Such heavy price markdowns, while very attractive for consumers, appear to have seriously impacted the business of mom-and-pop stores as also large offline retailers selling the same brands

The government’s move comes after local traders complained that they were being put out of business. The new rules appear to be the Modi government’s way of demonstrating its intent to walk the talk in support of the local traders.

Online marketplaces have found the new rules restrictive.

Petrol price hiked by 19 paise, diesel by 28 paise

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Petrol price was hiked on Friday by 19 paise per litre and diesel by 28 paise, the second increase in rates in as many days on firming input cost.

Petrol in Delhi now costs Rs 69.07 per litre - the highest this month - up from Rs 68.88 per litre rate of Thursday, according to price notification issued by state-owned oil firms.

A litre of diesel in Delhi is now priced at Rs 62.81 as compared to Rs 62.53 on Thursday.

In Mumbai, petrol now costs Rs 74.72 a litre and diesel is priced at Rs 65.73.

Rates vary from state to state depending on the rate of local sales tax or VAT.

The increase -- third this month -- comes on the back of a 38 paise increase in petrol rates and 29 paise in case of diesel announced on Thursday.

On January 7, the petrol price was hiked by 21 paise and diesel by 8 paise. Rates were unchanged on January 8 and 9.

In three hikes, petrol price has gone up by a total of 78 paise a litre and diesel by 55 paise, according to the price notification.

Prior to these hikes, rates had cooled to a year low of Rs 68.29 for petrol and Rs 62.16 in case of diesel. This followed a decline in rates on almost all days since October 18, 2018.

In all, the petrol price has fallen by Rs 14.54 per litre since October 18, more than negating all of the hikes that were witnessed in the two-month period beginning mid-August. Diesel price has declined by? Rs 13.53 per litre in two and a half months.

Petrol price had touched a record high of Rs 84 per litre in Delhi and Rs 91.34 in Mumbai on October 4. Diesel on that day had peaked to Rs 75.45 a litre in Delhi and Rs 80.10 in Mumbai.

Prices had started to climb from August 16.

Petrol in Delhi was priced at Rs 77.14 and in Mumbai at Rs 84.58 per litre on August 15. Diesel on that day was priced at Rs 68.72 per litre in Delhi and Rs 72.96 in Mumbai.

Between August 16 and October 4, the petrol price was hiked by Rs 6.86 per litre and diesel by Rs 6.73.

On that day, the government decided to cut excise duty on petrol and diesel by Rs 1.50 per litre each and asked state-owned fuel retailers to subsidise the price by another Re 1 a litre by reducing their margins.

Subsequent to this, the petrol price moderated to Rs 81.50 per litre in Delhi and diesel to Rs 72.95 a litre on October 5. In Mumbai, rates fell to Rs 86.97 for petrol and Rs 77.45 in case of diesel.

As the international oil prices continued to rise, the prices of petrol and diesel in Delhi increased to Rs 82.83 and Rs 75.69 respectively, on October 17. In Mumbai, rates touched Rs 88.29 a litre for petrol and Rs 79.35 for diesel.

Sri Lanka banks on RBI swaps to boost its reserves: PM Ranil Wickremesinghe

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Sri Lankan Prime Minister Ranil Wickremesinghe on Thursday said that the SAARC swap arrangement with the Reserve Bank of India (RBI) is part of the international assistance to boost the island's flagging reserves.

"The Reserve Bank of India has agreed to give our Central Bank USD 400 million under the SAARC currency swap arrangement. They (the Indians) are considering a further large sum," Wickremesinghe told parliament.

His remarks came a day after Sri Lanka's Central Bank on Wednesday said that the RBI has agreed to provide USD 400 million under the SAARC swap arrangement to boost the island nation's reserves. It said that a further request to the RBI for another SWAP arrangement of USD 1 billion is "under consideration".

Wickremesinghe said that Lanka will make its highest ever debt payment in history – USD 2600 million - on January 14.

"Within 2019 we have to pay USD 5900 million by way of interest and capital on foreign loans," he said.

Wickremesinghe said that the nearly two-month long political crisis had an adverse impact on the country's economy.

"During the 51 days, our Rupee fell by 3.8 per cent. When all other currencies were appreciating, the rupee was falling. There were capital outflows from the country," he said.

"We are yet to quantify the losses, but it was a death blow to an economy that was struggling to recover," Wickremesinghe told parliament.

President Maithripala Sirisena's dramatic move on October 26 to sack Prime Minister Wickremesinghe and install former strongman Mahinda Rajapaksa in his place following differences over policy issues, left the country without a functioning government for nearly two months. However, a Supreme court verdict forced Sirisena to reinstate Wickremesinghe.

Sri Lanka's reserves dipped from USD 7991 million to USD 6985 million during the crisis, the prime minister said.

Due to the political crisis, the big three credit rating agencies -- Fitch Ratings, Standard & Poor's (S&P) and Moody's -- downgraded Sri Lanka's sovereign rating.

Wickremesinghe said the government is in the process of raising USD 1.9 billion to boost its reserves. One billion dollars are to be raised in international markets while USD 500 million would be raised from Chinese Panda funds and Japanese Samurai Funds in addition to the USD 400 million from India's RBI under SAARC currency swap arrangement.

The government's priority right now is to work for the rupee's stabilisation, Wickremesinghe said. The weaker rupee has caused cost escalation of raw materials and all imports.

Govt should be able to keep fiscal deficit target of 3.2-3.3%: JPMorgan

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Jahangir Aziz of JPMorgan is expecting the government to maintain fiscal deficit target of 3.2-3.3 percent.

"We do expect the government to make it (fiscal deficit) to 3.2 whether it is through finding new sources of revenue in the last few months or through contraction expenditure, most likely you will get 3.3 or slightly higher than 3.3 for the central government," he said.

Indian economy is expected to grow at 7.2 percent in 2018-19 against 6.7 percent in the previous fiscal mainly due to improvement in the performance of agriculture and manufacturing sectors, the Central Statistics Office (CSO) said on January 7.

The CSO estimate is, however, a bit lower than 7.4 percent growth projected by the Reserve Bank for the current fiscal.

"I have stopped focusing on levels of growth numbers given the uncertainty associated with them. So let us just focus on the trajectory of it. We had a decent first half and clearly there is a slowdown in the second half. At least the slowdown in the second half is consistent with what is happening elsewhere in the economy, what is happening to credit numbers, what is happening to credit situation including what has happened to global trade, which has slowed down quite a bit. So at least we have the first half and the second half consistent, which is a relief. The way we are looking at it, this slowdown is probably going to continue till the second calendar quarter of 2019. So the first quarter of next year and then once the impact of the liquidity and the financial conditions tightening fade, we should see some recovery beginning in the second half of calendar 2019," said Aziz.

Govt should be able to keep fiscal deficit target of 3.2-3.3%: JPMorgan

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Jahangir Aziz of JPMorgan is expecting the government to maintain fiscal deficit target of 3.2-3.3 percent.

"We do expect the government to make it (fiscal deficit) to 3.2 whether it is through finding new sources of revenue in the last few months or through contraction expenditure, most likely you will get 3.3 or slightly higher than 3.3 for the central government," he said.

Indian economy is expected to grow at 7.2 percent in 2018-19 against 6.7 percent in the previous fiscal mainly due to improvement in the performance of agriculture and manufacturing sectors, the Central Statistics Office (CSO) said on January 7.

The CSO estimate is, however, a bit lower than 7.4 percent growth projected by the Reserve Bank for the current fiscal.

"I have stopped focusing on levels of growth numbers given the uncertainty associated with them. So let us just focus on the trajectory of it. We had a decent first half and clearly there is a slowdown in the second half. At least the slowdown in the second half is consistent with what is happening elsewhere in the economy, what is happening to credit numbers, what is happening to credit situation including what has happened to global trade, which has slowed down quite a bit. So at least we have the first half and the second half consistent, which is a relief. The way we are looking at it, this slowdown is probably going to continue till the second calendar quarter of 2019. So the first quarter of next year and then once the impact of the liquidity and the financial conditions tightening fade, we should see some recovery beginning in the second half of calendar 2019," said Aziz.

Sugar production rise 7% during October-December 2018 to 110.5 lakh tonnes

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India's sugar production increased by 7 percent to 110.52 lakh tonnes in the first quarter of 2018-19 marketing year that started in October, as mills in Maharashtra and Karnataka started operations early, industry body ISMA said on Friday.

"As on December 31, 2018, 501 sugar mills were in operation in the country and have produced 110.52 lakh tonnes of sugar, as compared to 103.56 lakh tonnes produced by 505 sugar mills as on 31st December 2017," Indian Sugar Mills Association (ISMA) said in a statement.

Maharashtra and Karnataka sugar mills started their crushing earlier this year and this resulted in rise in output in the first quarter of 2018-19 marketing year (October-December 2018).

"However, due to substantially lower rainfall and white grub infestation, Maharashtra will produce significantly lower quantity this year as compared to last. Overall, the country is expected to produce much less sugar this season as compared to last," ISMA said.

Earlier, the association had estimated that production could fall to 315 lakh tonnes in 2018-19 from 325 lakh tonnes in the previous year. The country's annual domestic demand is 260 lakh tonnes.

As per the data, mills in Uttar Pradesh have produced 31 lakh tonnes during October-December 2018, with an average recovery of 10.84 percent as compared to 33 lakh tonnes with an average recovery of 10.14 percent in the corresponding period of the previous year.

Although average recovery of sugar from cane is higher, the sugar production in UP would be lower as the sugarcane yield per hectare is lower than last season.

In Maharashtra, sugar production rose to 43.98 lakh tonnes from 38.39 lakh tonnes. The average sugar recovery so far is 10.50 percent as against 10.23 percent achieved in the corresponding period of 2017-18.

"Due to lower availability of cane in Maharashtra and an early start (of operation), the mills therein would be closing much earlier than last year," ISMA said.

Sugar production in Karnataka increased to 20.45 lakh tonnes from 16.83 lakh tonnes during the period under review.

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