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Analysis: Policy vacuum ahead of polls clouds India's oil demand growth

Singapore — India's oil demand growth has slowed to a trickle on the back of sluggish sale of transport fuels, as consumers defer vehicle purchases until clarity on new taxes and policies emerges when a new government is in place after the federal elections.

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While April oil demand numbers showed oil demand growth of below 1% year on year, analysts are of the view that demand from May onwards would be relatively stronger than the previous month because of a rise in demand for commercial transportation for election-related travel.

"India's total product demand in the near term is likely to get a boost from the coming elections, but there are headwinds ahead, such as slowing economy, weak vehicle sales and higher fuel prices," said Lim Jit Yang, advisor for oil markets at S&P Global Platts Analytics.

India's oil demand in April posted a modest rise of 0.3% year on year to 17.83 million mt, or 4.67 million b/d, from 17.78 million mt a year earlier, data from the Petroleum Planning and Analysis Cell showed. But overall oil products demand in April was 5.5% lower month on month from 18.87 million mt recorded in March.

Demand for diesel in April rose by only 2% year on year to 7.31 million mt, from 7.17 million mt a year earlier, while gasoline demand was up 7.6% to 2.46 million mt, from 2.28 million mt. However, diesel demand fell 1.8% month on month, while gasoline demand was down 4.7% month on month, PPAC said.

VEHICLE SALES SLOW

Analysts said higher crude oil prices in April and a slowdown in passenger vehicle and car sales led to the month-on-month fall in demand.

"Consumers in India are holding their purchases due to political uncertainties over new policies and tax rates until the elections are over," Senthil Kumaran, consultant at Facts Global Energy, said.

"Automobile companies are lowering production rates, and subsequently sales to dealers, in preparation for nationwide spec changes later this year. This is causing a temporary slowdown in demand," he added.

India's auto sales in March contracted for a fourth consecutive month, with total vehicle sales in Q1 falling 7.6% year on year. Sales of passenger cars and two-wheelers in Q1 fell by 2% and 9% year on year, respectively.

"Sales should recover as the economy improves, coupled with more certainty after the elections," Platts Analytics said.

India's federal polls -- held in seven phases -- will end on May 19 and the results will be declared on May 23.

S&P Global Platts Analytics has recently revised down India's 2019 oil products demand growth forecast to 220,000 b/d, from an earlier forecast of 240,000 b/d, and compared with an actual growth of around 200,000 b/d in 2018.

A weaker industrial growth outlook was also taking a toll on diesel demand, Platts Analytics added. India's manufacturing PMI eased to 51.8 in April, from 52.6 in March, suggesting that growth in the sector was slowing.

"Soft data, including PMIs for manufacturing and services have stabilized although hard industrial output data have yet to recover. Leading indicators, such as order books, point to improving activity ahead in the coming quarters," S&P Global Ratings said in its April research report.

DEMAND FOR CLEAN FUELS

Demand for LPG in April rose 2.4% year on year to 1.91 million mt, from 1.86 million mt a year earlier. But LPG demand was down 16% month on month in April as no new cooking gas connections to lower income households were issued during the freeze period before the general elections.

But in March -- just before the elections started -- LPG demand had surged 10.2% year on year due to Prime Minister Narendra Modi-led government's thrust to provide the clean cooking fuel to the poor households.

"As expected, LPG demand stayed strong as the government continued to boost sales to impress voters of achievement ahead of federal elections," Platts Analytics said.

Over January-April, LPG demand rose 9.6% year on year to 8.7 million mt, from 7.94 million mt in the same period a year earlier, PPAC said.

The government's LPG scheme, launched in 2016, has helped to lift the national average of the country's LPG penetration from about 56% to touch an all-time high of close to 80% last year. The government achieved its first target of giving out 50 million new connections last August and is aiming to give another 30 million new connections by March 2020.

"These policies will support LPG demand and cause it to increase strongly in the coming years," Facts Global Energy said in a research report.

FGE expects India's oil demand to grow by a total of 2.4 million b/d between now and 2030.

"Rising affluence, favorable demographics and a spur in infrastructure investments amidst the expected economic resilience will make India a key driver of global oil demand growth in the years to come, provided political conditions and policies remain conducive," it added.

--Sambit Mohanty, sambit.mohanty@spglobal.com; with Ratnajyoti Dutta in New Delhi, newsdesk@spglobal.com

--Edited by Geetha Narayanasamy, newsdesk@spglobal.com