India's diesel demand growth seen stuck in low gear until mid-2020

India'sdemandfordieselwill remain subdueduntilthe second half of2020, when analysts expect various policy measures aimed at stimulating industrial activity to kick in and soak up excess fuel.

Untilconsumption picks up in Asia's third-largest economy, where economicgrowthhas slowed to six-yearlows, refiners are likely to extend their recent stretch of raredieselexports, which have weighed on refining margins in the region.

Dieselaccounts for about two-fifths of refined fueldemandin India, which has grown by its slowest pace since the fiscal year 2014 this year amidtight credit markets, contracting auto sales and slowing rail and air traffic.

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Dieselexports could climb by up to 8 million tonnes in the 2019-20 fiscal year from the 28 million tonnes shipped the year before, said an executive at a state refiner who could not be named due to company policy.

Ship-tracking data compiled by Refinitiv showIndia'sdieselexports since the fiscal year start in April have jumped 8.9 per centfrom the same period in 2018 to 17.7 million tonnes, the highest for that time span since at least 2015.

India consumed 83.5 million tonnes ofdieselin the 2018/19 fiscal year, Ministry of Petroleum and Natural Gas data show, which was a record and 3 per centabove the prior year's total.

Butdemandgrowthin 2019/20 could be "flat or 1 per cent", according to K. Ravichandran, group head for corporate sector ratings at ICRA Ltd, a local of arm of Moody's.

Bhanu Patni, oil and gas analyst at Fitch's local unit Indian Ratings, saiddieselconsumption will continue to contract for the next several months.

"Dieselconsumption will not improve before the first half of2020," she said.

India announced cuts to corporate tax rates in September to help boost manufacturing and private investment, while the central bank also cut interest rates to spur economic activity, but the steps have yet to increasedemand.

India has not released factory output data for October, but a 7.4 per centdecline in the month'sdieselconsumption thelowest in three years - suggests the country's industrial engine continues to sputter.

Dieseldemandhas also taken a hit from lingering monsoon rains which curbed consumption in the farm sector and hindered rural construction work since September.

Greater use of solar-powered irrigation pumps has dented farm sectordemand, while a steady shift away fromdieselto gasoline-powered cars has also sloweddieselconsumption.

Oildemandmay also be curbed byIndia'sslowdown. Data last week showed annual economicgrowthslowed to 4.5 per centin the July-September quarter, the weakest pace since 2013.

Even so, analysts expect the government's stimulus efforts to gain traction in the coming months and lead to a lift indieseluse in2020.

Singapore based consulting firm FGE expectsIndia'sdieseldemandgrowthto rise to about 2 per centin2020/21 from below1 per centin 2019/20, said Sri Paravaikkarasu, director for Asia Oil.

"We could expect the government to launch some stimulus measures to boost momentum inIndia'seconomicgrowth. This should support industrial and freight activities and infrastructure developments...providing the needed impetus to gas oildemandgrowth," she said.

The government is pushing for more reforms and incentives to attract foreign investors to set up factories in India.

An executive at a state refiner, who could not be named due to company policy, saiddieseldemandwill continue to rise even if economicgrowthwas slower and was more upbeat about2020demand.

"This year we expectgrowthof 1.5 per cent-2 per centindieselsales, and next year it could be 3-4 per cent," he said.