Why govt deregulated sale of locally produced crude oil and what it means

by 5paisa Research Team Last Updated: 2022-06-29T17:04:42+05:30

The Narendra Modi government on Wednesday deregulated domestic crude oil prices in a bid to boost sagging production, boost tax revenues and remove market anomalies.

This effectively means that domestic producers of crude oil will now be able to sell the commodity to any private or government company in the domestic market.

From when will the new deregulated regime be implemented?

The new regime will come into effect from October this year.

Why has the government deregulated domestic crude oil?

India’s domestic production of crude oil has gone south to historically low levels. The government wants to incentivise local companies to drill more oil and has therefore given them the freedom to sell the commodity on a deregulated basis.

India's domestic crude production has been on a consistent decline. In FY22, the production slipped to 28.4 MMT, the lowest in over two decades. The production in 2021-22 represented a decline of 11.8% from 32.2 MT in FY95, increasing the economy's vulnerability due to skyrocketing global oil prices.

If oil production in the country goes up, it will also mean more taxes for the government, especially since crude does not yet come under the Goods and Services Tax (GST) regime.

Does the government also want to try and save some precious forex?

Yes. Despite being the third-largest consumer of oil, the nation depends on imports to meet 85% of its needs.

In FY22, the country's crude oil import bill ballooned to $120.4 billion as the crude prices surged.

High reliance on imports has inflated India’s crude import bill and widened the trade deficit. State-owned ONGC, which accounts for a bulk of domestic crude production, has seen its output decreasing steadily.

Which companies will be the most impacted by this move?

Government-owned ONGC Ltd and Oil India Ltd are two of the largest producers of domestic crude in India. Among the private companies, Cairn Oil & Gas, owned by Anil Agarwal’s Vedanta Group, is also a sizable crude oil producer.

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