By November 19, 2017 Read More →

India’s GST – A boon for oil markets?


India’s GST increasing oil demand

Tax on pure electric vehicles reduced by around 9% under GST regime

The introduction of India’s Goods and Services Tax (GST) has lifted oil demand in the country this year, according to Wood Mackenzie.

Crude oil, natural gas, diesel and gasoline are currently exempt from the GST. However, diesel and gasoline demand are indirectly affected by the impact of GST on vehicle prices and sales, especially in the logistics sector.

In the third quarter this year, passenger car and utility vehicle sales 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, gasoline demand grew 9 per cent in Q3 2017. The strong growth was also supported by increased agricultural output leading to higher rural disposable income and discounts offered during the festive season (Diwali).

All the while, India’s expanding middle class and growing car ownership have also been pushing gasoline demand in the short term.


Looking at a broader picture, demonetisation, which was introduced late last year, dampened India’s gasoline demand growth in Q1 2017 at 3 per cent year-on-year, the slowest in the past decade.

Wood Mackenzie is forecasting growth will recover in Q1 2018 at around 9 per cent. Overall, gasoline demand looks positive in 2018, projected to increase to 670,000 b/d, a 7 per cent increase compared to 2017 levels.

The new tax regime hasn’t been so kind to hybrid cars. Contrary to India’s push towards cleaner transportation, the GST has led to an increase in hybrid car prices by over 13 per cent and this has affected sales.

For instance, Toyota, one of the largest manufacturers of hybrid cars in India, halted the production of its Camry Hybrid after sales plummeted by over 73 per cent year-on-year in Q3 2017.

In contrast, the tax on pure electric vehicles has reduced by around 9 per cent under the GST regime, 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.

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 gasoline 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 b/d, with the road freight sector contributing more than 86 per cent.

The Indian government plans to invest around US$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.

Diesel demand in India is estimated to surge by 40,000 b/d in Q4 2017. In the short term, diesel demand projected to grow by 60,000 b/d in 2018, 50 per cent higher than 2017 levels.

In summary, 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.

Since the incremental tax on GST is only applicable for five years, we expect car prices to fall further, lending support to gasoline demand in the long term.

Consequently, the tax gap between conventional cars and EVs will narrow in the same period. As India pushes towards a wider EV adoption policy, Wood Mackenzie anticipates EV manufacturers will face greater cost rivalry from the current players.


Wood Mackenzie also forecasts a boost to freight diesel in the short to long term thanks to the removal of bureaucratic 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.

Wood Mackenzie says they cannot rule out the inclusion of crude and petroleum products in the GST ambit in the future, it will be a huge challenge given the state governments currently receive substantial revenues from petroleum product sales.

Posted in: Politics

Comments are closed.