The government of India was right in imposing a condition of ₹2,000 crore investment in the oil and gas infrastructure sector at the beginning of the century, as demand for petrol and diesel was growing almost in double digits. This made fuel retail business a very lucrative one.
Today, though there has been a demand growth of diesel, it has become almost stagnant. However, petrol demand growth is still around 6%, necessitating opening of retail outlets (ROs) every year. The government has now approved further opening up the fuel retail sector for private players with a meagre net worth of ₹250 crore as compared to the prior investment requirement of ₹2,000 crore.
While this may open the floodgates for investors, the government needs to adopt a cautious approach, as opening an uncontrolled number of outlets may led to inviability of many existing as well as new outlets. The situation may get exacerbated with public sector oil marketing companies (OMCs)—Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd —planning to set up over 78,493 more fuel pumps around the country.
Ratings agency Crisil rightly pointed out the concerns in its report, “Hence, the question that arises is whether the players will be able to maintain operational sustainability and profitability, and ensure a return on investment (RoI) with the more than doubling of pumps in the country."
“Mature fuel retail markets such as the US have ~150,000 petrol pumps, which is a sharp decline from the 202,800 pumps in 1994. Stagnating fuel demand and deteriorating pump economics led to the closure or consolidation of pumps," the report added.
The Indian government also needs to factor in the impact of alternative fuels entering the Indian market in the near future. A case in point being India’s Faster Adoption and Manufacturing of Hybrid and Electric Vehicles or FAME 2 scheme—to expand commercial vehicle fleet—announced with an outlay of ₹10,000 crore.
That day is not far, given that BP Plc’s group joint venture (JV) with Reliance Industries Ltd (RIL) plans to roll out charging networks across the country in the future. The government also plans to install one electric vehicle charging station after every 4km in cities and 25km on both ways of highways connecting to these cities. Also, as reported by Mint, India is currently giving final touches to a plan to build Tesla-style giga factories to develop its own domestic battery manufacturing ecosystem. This involves a raft of incentives such as concessional financing options, friendly tax regimes and a suitable basic customs duty safeguard.
These measures come at a time when India, the biggest emitter of greenhouse gases after the US and China, has been pushing for a gas-based economy and plans to connect 10 million households to piped natural gas by 2020.
Given the imperatives involved, India should err on the side of caution at a time when the country is battling a demand slowdown.
B.M. Bansal is a former Indian Oil Corp. chairman.