Reforms in Exploration and Licensing Policy: Oil & Gas
The Cabinet Committee on Economic Affairs (CCEA), chaired by the Prime Minister has approved the Policy framework on reforms in the exploration and licensing sector for enhancing domestic exploration and production of oil and gas.
- Attract new investment in Exploration and Production (E&P) Sector.
- Intensification of exploration activities in unexplored areas.
- Liberalizing the policy in producing basins.
➤ Four Focus Areas:
- Increasing Exploration Activities in Unexpected Areas:
- Bidding out uncommercialized basins to contractors without them having to share revenue or production with the Government and only paying royalties/levies.
- For unallocated/unexplored areas, the bidding to be based on a revenue-sharing basis but more weightage to work programme to be given.
- Shorter exploration period and fiscal incentives.
- Marketing and Pricing Freedom:
- To incentivize enhanced gas production, marketing and pricing freedom to be granted for those new gas discoveries whose Field Development Plan (FDP) is yet to be approved.
- FDP is the evaluation document of multiple development options for a field and selecting the best option based on assessing tradeoffs.
- Fiscal incentive on additional gas production from domestic fields over and above normal production.
- Preparation of Enhanced Production Profile:
- Public sector Undertakings like Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) will prepare an enhanced production profile to enhance production from their existing fields.
- For production enhancement, bringing new technology, and capital, No Objection Certificates (NOCs) will be allowed to induct private sector partners.
- Promoting Ease of Doing Business:
- Measures like setting up coordination mechanism and simplification of approval, alternate dispute resolution mechanism, etc.
- Domestic production of oil and gas was declining, import dependence was rising and investment in E&P activities was reducing. Thus, policy reform in this sector was needed.
- Earlier, the government between 2016 and 2019 had given pricing freedom for all fields except those given to state-owned ONGC and OIL on a nomination basis.
- But, there were restrictions on marketing like a ban on affiliates of producers buying the fuel, etc. This restricted competition kept prices artificially low.
- The Hydrocarbon Exploration and Licensing Policy or HELP was approved in March 2016 to increase transparency and decrease administrative discretion in granting hydrocarbon licenses. It replaced the New Exploration Licensing Policy (NELP), 1997.
- Recently, India also launched its first gas exchange which has been named as the Indian Gas Exchange (IGX).
• Development of support services.
• Employment generation.
• Transfer of advanced technology.
• Reducing import dependence.
• Improve energy security of the country.
• Save the precious foreign exchange on imports.
- Crude petroleum occurs in sedimentary rocks of the tertiary period.
- It consists of hydrocarbons of liquid and gaseous states varying in chemical composition, colour and specific gravity.
- It is an essential energy source for all internal combustion engines in automobiles, railways and aircraft.
- Its numerous by-products are processed in petrochemical industries such as fertiliser, synthetic rubber, synthetic fibre, medicines, vaseline, lubricants, wax, soap and cosmetics.
- Venezuela, Saudi Arabia, Canada, Iran, Iraq, Kuwait, Russia are some major countries with the largest oil reserves.
- Digboi, Naharkatiya and Moran in Assam, Ankleshwar, Kalol, Mehsana, Navagam, Kosamba and Lunej in Gujarat; Mumbai High in Maharashtra are important oil-producing areas in India.
➤ Natural Gas
- Natural gas is found with petroleum deposits and is released when crude oil is brought to the surface. It can be used as a domestic and industrial fuel.
- Russia, Norway, UK and the Netherlands are the major natural gas producers.
- In India, Jaisalmer, Krishna Godavari delta, Tripura and some areas offshore in Mumbai have natural gas resources.
- The Gas Authority of India Limited was set up in 1984 as a public sector undertaking to transport and market natural gas.
➤ Oil and Natural Gas Corporation
- ONGC is a Maharatna Public Sector Undertaking (PSU) of India's Government.
- It was set up in 1995 and is under the Ministry of Petroleum and Natural Gas.
- It is the largest crude oil and natural gas company in India, contributing around 70% to Indian domestic production.
GDP Revival Forecast: RBI
Recently, the Monetary Policy Committee of the Reserve Bank of India (RBI) has announced the extension of its accommodative policy stance for the rest of this year and 2021-22 and forecasted a Gross Domestic Product (GDP) revival in coming months.
- RBI had previously introduced several Monetary Policy Reports measures for dealing with the Covid-19 induced economic setback.
- RBI has kept key policy rates unchanged to revive the economy's growth and mitigate the economic impact of Covid-19 pandemic.
- The Repo and reverse repo rate unchanged at 4% and 3.35% respectively because of high inflation.
- Risk weights, i,e, the capital required to be set aside on individual home loans, have been relaxed and the loan limit for retail and small business borrowers have been raised.
- This would boost the job-intensive real estate sector that has been suffering in the pandemic.
- Real-Time Gross Settlement (RTGS) will be available round the clock.
- Targeted Long Term Repo Operations (TLTRO) of Rs. 1,00,000 crore for the revival of specific sectors, and Open Market Operations (OMOs) for State Development Loans (SDLs) have been announced.
- This will assure market participants of access to liquidity and easy finance conditions.
- LTRO is a mechanism to facilitate the transmission of monetary policy actions and credit flow to the economy. This helps in injecting liquidity in the banking system.
- OMO is one of the quantitative monetary policy tools employed by the central bank of a country to control the money supply in the economy.
- OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
- The central bank sells g-secs to commercial banks to remove the system's liquidity and buys back g-secs to infuse liquidity into the system.
- GDP Revival:
- Real GDP in FY21 will fall by 9.5%.
- GDP growth may break out of contraction and enter a positive zone by Q4 of the current fiscal year (2020-21)
- Starting from a modest recovery, the economic activity is expected to gain traction in Q3.
- The real GDP growth in 2020-21 is expected to be negative at -9.8% in Q2 of 2020-21, -5.6% in Q3 and 0.5% in Q4.
- Real GDP is likely to grow by 20.6% in the Q1 of 2021-22.
- Decline in Inflation:
- Inflation is expected to decline in the next 3 months and is likely to ease to the projected target of around 4% (within a band of +/- 2%) by Q4 of FY'21.
- Supply chain disruptions is the major factor driving up inflation. As supply chains are restored, the inflation would come down.
- The retail inflation growth was 6.69%, as of August 2020.
- Restart of Economy:
- The economy is likely to witness a three-speed recovery i.e. individual sectors showing varying paces with fastest, modest and slowest recovery rates.
- Apart from agriculture, sectors such as fast- moving consumer goods, automobiles, pharma and power would revive first.
- Monetary Policy Committee
- It is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
- The Governor of RBI is ex-officio Chairman of the committee.
- The committee comprises six members (including the Chairman), three RBI officials, and three external members nominated by India's Government.
- Decisions are taken by majority with the Governor having the casting vote in case of a tie.
- The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).
- An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended establishing the Monetary Policy Committee.
➤ Repo Rate and Reverse Report Rate
- It is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in any shortfall of funds.
- It is used by monetary authorities to control inflation.
- In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and helps in arresting inflation.
- The central bank takes the contrary position in the event of a fall in inflationary pressures.
- Ideally, a low repo rate should translate into low-cost loans for the general masses. When the RBI slashes its repo rate, it expects the banks to lower their interest rates charged on loans.
- Reverse repo rate is when the RBI borrows money from commercial banks within the country.
Contraction in GDP of India in 2020-21: World Bank
Recently, the World Bank released its South Asia Economic Focus report which estimated that India's Gross Domestic Product (GDP) can contract by 9.6% in 2020-21.
- This estimate is way below the earlier forecast of 3.2% contraction, made in June.
➤ Contraction of Indian Economy in 2020-21
- The contraction is due to the impact of the national lockdown against the outbreak of the Covid-19 pandemic and the income shock experienced by households and small urban service firms.
- The manufacturing and exporting industries are likely to be depressed, and the construction sector is also likely to experience a protracted slowdown.
- This is due to a limited pipeline of public sector infrastructure projects and reliance of these industries on migrant workers who have not yet returned to cities where they worked.
- Significant disruptions to jobs are likely to boost the poverty rate, with 2020 rates back to levels in 2016.
- The biennial Poverty and Shared Prosperity Report was recently released by the World Bank which stated that Covid-19 can add around 27-40 million new poor in Sub-Saharan Africa and around 49-57 million in South Asia region, causing over 1.4% of the world's population to fall into extreme poverty.
- The demand slowdown could lead to rising loan non-repayment and risk aversion impacting the financial markets.
- Other concerns include health care system capacity constraints, rising food prices, sharp drops in earnings of informal workers, impact on the MSMEs etc.
➤ South Asian Scenario:
- The entire South Asia region may face its worst- ever recession.
- The regional GDP is estimated to contract by 7.7% in 2020, which stayed above 6% annually in the past five years.
- This recession will be different from previous ones as earlier downturns were mainly due to falling investment and exports but this pandemic-induced recession is due to a decline in private consumption.
- Private consumption, which has been traditionally the backbone of demand in South Asia and a core indicator of economic welfare, will decline by more than 10%. This will spike poverty rates.
- A decline in remittances is also expected to accelerate the loss of livelihoods for some countries' poorest.
- Other South Asian Countries: Countries like the Maldives, Sri Lanka will see a contraction in their economies while Pakistan, Bangladesh, Bhutan will witness slow growth in 2020-21.
- The collapse of South Asian economies during Covid-19 has been the worst of all for small businesses and informal workers who suffer sudden job losses and vanishing wages.
➤ Rebound of Economy in 2021-22
- India's growth is estimated to rebound to 5.4% in 2021-22.
- However, this will be reflecting base effects and are based on the assumption that Covid-related restrictions will be completely lifted by 2022.
- Base Effect: The distortion in a monthly inflation figure results from abnormally high or low levels of inflation in the year-ago month.
- South Asia's growth is projected to rebound to 4.5% in 2021.
- However, due to population growth, per-capita income in the region will remain 6% below 2019 estimates.
- The expected rebound will not offset the lasting economic damage caused by the pandemic.
- However, the pandemic could spur innovations that improve South Asia's future global value chains participation.
- The Supply Chain Resilience Initiative is a step in this direction, reducing the dependence on imports from a handful of countries.
- The comparative advantage that South Asia and India have in tech services and niche tourism will likely be in higher demand as the global economy becomes more digital.
➤ Other Related News:
India's eight core industrial sectors contracted by 8.5% in August 2020 compared to August 2019, marking the sixth month in a row of shrinking output. o According to the recent National Statistical Office (NSO) data, India's GDP growth contracted by 23.9% in the first (April-June) quarter of 2020 compared to the same period (April-June) in 2019.
India’s Public Debt Ratio
As per the International Monetary Fund (IMF), India's public debt ratio is projected to jump by 17 percentage points to almost 90% because of increased public spending due to Covid-19.
- India's public debt ratio has remained stable at about 70% of the Gross Domestic Product (GDP) since 1991.
➤ Increase in Public Debt Ratio:
- The increase in public spending, in response to Covid-19, and the fall in tax revenue and economic activity, will make the public debt ratio jump by 17 percentage points.
- The ratio is projected to stabilise in 2021, before slowly declining up to the end of the projection period, in 2025.
- The pattern of public debt in India is close to the world's norm.
- This debt-to-GDP ratio is the metric comparing a country's public debt to its GDP). It is often expressed as a percentage.
- By comparing what a country owes (debt) with what it produces (GDP), the debt-to-GDP ratio reliably indicates a particular country's ability to pay back its debts.
- A country with a high debt-to-GDP ratio typically has trouble paying off public debts.
➤ Assessment of Fiscal situation (relating to taxation, public spending, or public debt):
- India has been an important source of growth in the world since the 1991 economic liberalisation reforms.
- Real GDP growth averaged 6.5% between 1991 to 2019, and real GDP per capita was multiplied by four over that period.
- Real GDP is calculated so that the goods and services are evaluated at some constant set of prices.
- Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.
- This impressive growth performance helped lift millions of people out of extreme poverty.
- The extreme poverty rate, measured as the proportion of people whose income is less than USD 1.90 a day at purchasing power parity (the international poverty line), fell from 45% in 1993 to 13% by 2015.
- India achieved the millennium development goal of halving poverty by 2015 (from its 1990 level).
- India has made astonishing progress in other areas as well:
- Education enrollment is nearly universal for primary school.
- Infant mortality rates have been halved since 2000.
- Access to water and sanitation, electricity, and roads has been greatly improved.
GST Compensation: Centre to Borrow on Behalf of States
Recently, the Centre has decided to borrow an estimated revenue shortfall of Rs. 1.1 lakh crore as loans to States to meet the Goods and Services Tax (GST) shortfall.
- The borrowing will not impact the fiscal deficit of the Government of India as the Centre is acting as mediator only. The Centre is borrowing the loan and passing that on to the states.
- The amounts will be reflected as the state governments' capital receipts and as part of financing of its respective fiscal deficits.
- The economic slowdown had reduced both GST and cess collections in FY 2019-20, resulting in a 40% gap (shortfall) between the compensation paid and cess collected.
- The state's GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
- The Centre distinguished the GST shortfall into two types:
- Due to GST implementation itself.
- Caused by the impact of Covid-19.
- The Finance Minister termed the fall of GST revenue due to Covid-19 as an act of God. However, the GST Compensation Act, 2017 did not foresee an act of God.
- The GST Compensation Act, 2017 guaranteed states that they would be compensated for any revenue loss in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
- The Centre has been at loggerheads with many states over the compensation issue due to GST shortfall. In August 2020 at GST Council meet, the Centre had proposed two options to states to meet the shortfall:
- A special window could be provided, in consultation with the Reserve Bank of India (RBI), so that the states can get Rs. 97,000 crore at a reasonable rate of interest, the amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.
- Another option is that this entire gap of Rs. The borrowing can meet 2.35 lakh crore by the states in consultation with RBI.
- However, many states were against these two options and were planning to move the Supreme Court over the issue.
- The borrowing by the Centre would avoid differential rates of interest that individual states may be charged for their respective State Development Loans (SDLs) and would be an administratively easier arrangement.
- The country's general government debt, which includes both the Centre's and States' borrowings will not increase due to this step.
- The States that get the benefit from the Special Window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2% of Gross State Domestic Product under Atmanirbhar Package.
- The borrowing limits of state governments was increased from 3% to 5% of GSDP for the year 2020-21 under Atmanirbhar Package.
➤ Goods And Services Tax
- GST was introduced through the 101st Constitution Amendment Act, 2016.
- An indirect tax levied on the supply of final goods and services. The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
- It is essentially a consumption tax and is levied at the final consumption point.
- It is levied only on the value addition and is collected on goods and services at each point of sale in the supply line.
- The GST that a merchant pays to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services. The set off tax is called input tax credit.
- The GST avoids the cascading effect or tax on tax, increasing the tax burden on the end consumer.
- Tax Structure under GST:
- Central GST to cover Excise duty, Service tax etc, State GST to cover VAT, luxury tax etc.
- Integrated GST to cover inter-state trade.
- IGST per se is not a tax but a system to coordinate state and union taxes. o It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.
RBI’s Annual Report on State Finances
Recently, the Reserve Bank of India (RBI) has released its annual report on state finances.
- Covid-19 Impact: The double whammy (also termed as scissor effect) of the Covid-19 pandemic, a collapse in revenue and rise in health-related and other costs, is likely to have a significant impact on state government finances.
- Fiscal Deficit: As most states presented their budgets before the onset of the pandemic, their budget estimates of deficits are unlikely to capture the true picture of the ongoing fiscal year (2020-21).
- The average value of gross fiscal deficit to Gross State Domestic Product (GSDP) for the states which presented their budget before the outbreak of the pandemic is 2.4%, while the average for the remaining states that made post-outbreak budget presentations is 4.6%.
- This indicates that the gross fiscal deficit of states will double for the 2020-21 period.
- Fiscal Deficit is the difference between the government's total income and its total expenditure.
➤ Capital Spending: Capital spending by the states will be lower than budgeted levels this year. Also, States may treat capital expenditure as a residual element.
- Lower spending is a result of states not being able to start many projects due to the lockdown in the first quarter and monsoon in the second quarter.
- Capital expenditure undertaken by states is generally treated as a residual and is prone to adjustment, conditional upon revenue generation.
- Capital expenditure is the money spent on the acquisition of assets like land, buildings, machinery, equipment, and investment in shares.
- It accounts for more than 60% of general government (centre + states) capital expenditure.
➤ Tax Buoyancy: The implied tax buoyancy for 202021 is higher than budgeted based on 2019-20 revised estimates.
- Tax buoyancy is the ratio of change in taxes and GSDP (Gross State Domestic Product). Higher tax buoyancy implies that tax collection would rise faster for the same rise in incomes.
➤ GST Revenue: States Goods and Service Tax (SGST), the GST component, which accrues directly to the states, would suffer the biggest hit.
- SGST collections fell by 47.2% during the April- June 2020-21 quarter.
- State receipts will also suffer because of a fall in the divisible pool of the Centre's tax revenue.
➤ Overall Impact:
- States' indebtedness is set to rise. If an acceleration in growth does not accompany it, fiscal sustainability will become the casualty, overwhelming the prudence's modest gains in recent years.
- Due to a surge in contingent liabilities (guarantees), state governments may have to put investment projects on hold.
- To boost aggregate demand, state governments are reducing various kinds of expenditure. These include deferment and deduction of salaries and allowances and rationalization of travel and establishment expenses.
According to the Reserve Bank of India (RBI) data, the country's foreign exchange (forex) reserves touched a lifetime high of USD 555.12 billion after it surged by USD 3.615 billion in the week 16th October 2020.
➤ Reason Behind the Increase:
- The rise in total reserves was due to a sharp rise in Foreign Currency Assets (FCAs), a major component of the overall reserves.
- FCA jumped by USD 3.539 billion to USD 512.322 billion.
➤ Foreign Exchange Reserves:
- These are assets held on reserve by a central bank in foreign currencies, including bonds, treasury bills and other government securities.
- It needs to be noted that most foreign exchange reserves are held in USDs.
- These assets serve many purposes but are most significantly held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent.
India's Forex Reserves Include
➤ Foreign Currency Assets:
- FCA are assets valued based on a currency other than the country's own currency.
- It is the largest component of the forex reserve. It is expressed in dollar terms.
- It includes the effect of appreciation or depreciation of non-US units like the Euro, Pound and Yen held in the forex reserves.
- Currency appreciation refers to the increase in value of one currency relative to another in the forex markets.
- Currency depreciation is a fall in a currency's value in a floating exchange rate system.
- In a floating exchange rate system, market forces (based on demand and supply of a currency) determine a currency's value.
➤ Special Drawing Rights:
- These are an international reserve asset, created by the International Monetary Fund (IMF) in 1969 to supplement its member countries' official reserves.
- It is neither a currency nor a claim on the IMF. Rather, it is a potential claim on IMF members' freely usable currencies. SDRs can be exchanged for these currencies.
- The value of the SDR is calculated from a weighted basket of major currencies, including the USD, Euro, Japanese Yen, Chinese Yuan, and British Pound.
- The interest rate on SDRs or SDRi is the interest paid to members on their SDR holdings.
➤ Reserve position with the IMF:
- A reserve tranche position implies a portion of the required quota of currency each member country must provide to the IMF to be utilized for its purposes.
- The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee.
The Centre is working on restricting the number of fertiliser bags that individual farmers can buy during any cropping season.
➤ Fertiliser Subsidy:
- Farmers buy fertilisers at Maximum Retail Prices (MRP) below their normal supply-and-demand-based market rates or what it costs to produce/ import them.
- For example, the MRP of neem-coated urea is fixed by the government at Rs. 5,922.22 per tonne, whereas its average cost-plus price payable to domestic manufacturers and importers comes to around Rs. 17,000 and Rs. 23,000 per tonne, respectively.
- The difference, which varies according to plant-wise production cost and import price, is footed by the Centre as subsidy, which goes to the companies.
- The MRPs of non-urea fertilisers are decontrolled or fixed by the companies. However, the Centre pays a flat per-tonne subsidy on these nutrients to ensure reasonable prices.
- The per-tonne subsidy ranges from Rs. 10,231 to Rs. 24,000 for different types of fertilisers.
- Decontrolled fertilisers retail way above urea, as they attract lower subsidy.
- In April 2020, the Cabinet Committee on Economic Affairs (CCEA) cut the subsidy for non-urea fertilisers, which was about 3% lower than the previous year.
➤ Subsidy Mechanism:
- From March 2018, a new direct benefit transfer (DBT) system was introduced, wherein subsidy payment to the companies would happen only after actual sales to farmers by retailers.
- Each retailer has a point-of-sale (PoS) machine linked to the Department of Fertilisers' e-Urvarak DBT portal. Anyone buying subsidised fertilizers must furnish their Aadhaar or Kisan Credit Card (KCC) number.
- Only upon the sale getting registered on the e-Urvarak platform can a company claim subsidy, with these being processed every week and payments remitted electronically to its bank account.
- Currently, the Centre follows a "no denial" policy where anybody, non-farmers included, can purchase any quantity of fertilizers through the PoS machines.
- It allows for bulk buying by unintended beneficiaries, who are not genuine or deserving farmers.
- There is a limit of 100 bags that an individual can purchase at one time but it does not stop anyone from buying any number of times.
➤ Reason Behind the Restriction Plan:
- The main motive is to curb diversion, which is natural with any under-priced product.
- For example, urea whose basic MRP (excluding taxes and neem-coating cost) has been raised by hardly 11% since April 2010.
- Being super-subsidised, urea is always prone to diversion for non-agricultural use.
- For example, it is used as a binder by plywood/ particle board makers, cheap protein source by animal feed manufacturers or adulterant by milk vendors, apart from being smuggled to Nepal and Bangladesh.
➤ Proposed Measures:
- Discussions are going on to cap the total number of subsidised fertiliser bags that any person can buy during an entire Kharif or Rabi cropping season.
- It is expected that it would end even retail- level diversion and purchases by large buyers masquerading as farmers.
- A reasonable cap for a total of 100 bags only once would easily cover the seasonal requirement of a 20-acre farmer. Those wanting more can well afford to pay the unsubsidised rates for the extra bags.
➤ Other Associated Costs to the Farmers:
- Apart from fertilisers, there are other things for which farmers need to pay like Goods and Service Tax (GST) and other taxes on inputs.
- It ranges from 12% on tractors, agricultural implements, pumps and drip/sprinkler irrigation systems to 18% on crop protection chemicals.
- Fertiliser itself is taxed at 5%.
- Excise and value-added tax on diesel.
- And since there's no GST on farm produce, farmers cannot claim any input tax credit on their sales, unlike other businessmen.