Testing times for India's oil refineries

Wed, 1 Oct Pre-Open

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India's age-old state-owned oil refineries are running out of time. Commissioned in early 1950s and 1960s, these refineries will now have to face the survival test. The new Modi-led government is planning to deregulate the diesel market and open gates to private sector participation. The government is quite keen over removal of subsidies for refiners for selling fuel at below-market prices.

All is not well with respect to Indian refineries. They have been incurring heavy maintenance expenditure as inefficiencies have creeped in. Moreover, the outdated machinery does not support cheaper imported heavy crude. Besides, these refineries are located in remote areas that in turn restricts their potential to export fuel products. Cumulatively these factors have had a bearing on the refining margins. And with intense competition, margins are expected to narrow further.

Therefore, deregulation of diesel market makes lot of economic sense at this juncture. The bloated subsidy bill continues to loom large over the economic growth prospects of India. Moreover, public finances already stand stretched. Besides, diesel makes up nearly half of India's fuel consumption and its usage is expected only to increase going by the Modi's manufacturing boost agenda. Therefore, realizing the need of the hour, the government has decided to move to market-based pricing. Not surprisingly, this will see the private refiners such as Reliance Industries Ltd. and Essar Oil Ltd. grabbing the major market share form of the dominant state-run refiners. The state-run refiners account for a quarter of the nation's 4.3 million barrels per day fuel capacity. Against this backdrop, these refineries may be compelled to reduce throughput or seek monetary support. Thus state refineries now have to invest heavily and upgrade their refineries for better output and adequate margins. The state refiners however need to pull on their socks.

That said, the sooner we see a complete deregulation of diesel prices the better. This will also lead to better control over the fiscal deficit in the long term. If the government can demonstrate good control over its finances, the RBI would find it easier to cut interest rates as well. These structural changes can prove beneficial for the long term growth prospects of the economy. We certainly hope the Modi wave continues to yield positive results for the Indian economy.