Dalal Street

The proposed tax breaks on natural gas production is likely to cost around Rs 40,000 crore to the government, as indicated by the finance ministry.

Last year, the finance ministry had conveyed that the income tax exemption guaranteed by the Cabinet, on the production of oil and gas from the areas allocated under New Exploration Licensing Policy (NELP), was only for oil production and not for gas. This resulted in a subdued response to the last leg of the auction and delaying of the current auction process.

The revenue secretary is believed to be negotiating with the petroleum minister for a grant of seven years tax break on natural gas production.

It is expected that the tax breaks to natural gas producers like Reliance Industries will put a burden of around Rs 40,000 crore on the tax revenues.

But industry experts opined that the figure is not a realistic one, as it will take around four years for the companies to recover their investments and only after this recovery income tax can be levied. Apart from this, at the estimated revenue of around $4.5 billion, the balance three years will fetch around $1.5 billion as tax to the government.

Weekly spike continues. For the week ending 9 May ’09, headline inflation (wholesale price index, WPI) was 0.61%, in line with our and market estimates. The WPI for the week ending 14 Mar ’09 was raised to 0.71% from 0.27%. The consumer price index for industrial workers for Mar ’09 was 8.03% and for FY09 was 9.1%

Prices of primary articles stay up. Primary article prices continue to rise due to the jump in food prices. All the major components – food grains, fruit, condiments and spices, other food and non-food articles rose. Vegetables and pulses dipped marginally

Manufactured prices up. The rise in manufactured prices is largely due to the upward move in food product prices. Edible oil, textiles, chemicals and basic metals prices have also jumped up. Non-metallic products, machinery and transport equipment remained unchanged.

Outlook. We expect the WPI to slip into deflation by the end of May ’09. Inflation has spiked up w-o-w and we expect the trend to continue. This trend has reduced the likelihood of any further policy rate cuts in the near future.