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The introduction of Goods and Services Tax (GST) has lifted oil demand in India this year on higher sales of conventional passenger cars and utility vehicles, Wood Mackenzie said today.
While demonetisation dampened petrol demand growth to 3 per cent in the January-March quarter, slowest in the past decade, the growth will recover in the first quarter of 2018 to around 9 per cent, said the research and consultancy firm.
Crude oil, natural gas, diesel and petrol are currently exempt from the GST. But petrol and diesel demand are indirectly affected by the impact of GST on vehicle prices and sales, especially in the logistics sector, it said.
Wood Mackenzie's Asia refining research analyst Aman Verma said in a report that petrol demand is projected to increase to 670,000 barrels per day (bpd) in 2018, a 7 per cent increase compared to 2017 levels.
Diesel, the most consumed fuel in India, is estimated to grow by 60,000 bpd, 50 per cent higher than 2017 levels, he said.
"The GST will boost gasoline demand in the short to medium term, as more conventional passenger cars and utility vehicles are sold - much to the detriment of hybrids," he said.
Car prices may fall after five years once the cess levied to compensate states for loss of revenue from the introduction of GST, goes.
While this will lend support to petrol demand in the long term, the tax gap between conventional cars and electric vehicles (EVs) will narrow.
"As India pushes towards a wider EV adoption policy, we anticipate EV manufacturers will face greater cost rivalry from the current players," he said.
Wood Mackenzie also forecast a boost to freight diesel in the short to long term, thanks to the removal of obstacles when trucking between states.
"As the aftermath of demonetisation diminishes, businesses adapt to the GST and diesel car sales sink further, it will be the freight sector that will drive growth in diesel demand," it said.
Passenger car and utility vehicles sales in the July- September quarter rose 9 per cent and 27 per cent year-on-year respectively, compared with average quarterly growth of 2 per cent and 18 per cent over the past five years.
Consequently, petrol demand grew 9 per cent in the third quarter this year.
"The strong growth was also supported by increased agricultural output leading to higher rural disposable income and discounts offered during the festive season," Verma said.
While the inclusion of crude and petroleum products in the GST ambit in the future cannot be ruled out, it will be a huge challenge given that state governments currently receive substantial revenues from petroleum product sales.
GST hasn't been so kind to hybrid cars as it imposed higher tax rates which has led to 13 per cent rise in prices, affecting sales. But the same on pure electric vehicles has been cut by around 9 per cent, the greatest tax cut among all car and fuel types.
This is on top of cash incentives that buyers receive on EV purchases under India's Faster Adoption and Manufacturing of Hybrid and Electric Vehicles scheme.
"This clearly indicates the government's intent to promote EVs as a cleaner solution than hybrids. However, given the limited variety of models available and other challenges related to range and charging infrastructure, EV sales are unlikely to increase in the short term," Verma said.
Diesel car sales have dropped from 47 per cent of total car sales in 2012-13 to 23 per cent in 2016-17.
Increased focus on on-road diesel emissions, the reduced price gap between petrol and diesel fuel, and constraints on the use of older diesel cars in major cities are some of the factors that can be attributed to this trend.
A 2 per cent higher cess on small diesel cars compared with small gasoline cars partly indicates the government's intention to keep the former off the roads.
In 2016, diesel demand in the road transport sector was around 1.09 million bpd, with the road freight sector contributing more than 86 per cent.
Wood Mackenzie said the government plans to invest around USD 31 billion to build multi-modal logistics parks across the country.
"As logistics operators consolidate their warehouse infrastructure and operations, goods will be moved longer distances across states leading to greater demand for high- tonnage, long-haul trucks. This is likely to increase diesel demand in the freight sector in the long term," it added.