* Oil product demand growth to fall up to 40 pct from 2016
* Slowdown in factory activity to curb diesel demand
* Cash crunch cuts into car sales, gasoline demand
By Jessica Jaganathan
SINGAPORE, Jan 11 India's fuel demand growth is
expected to slow by as much as 40 percent in 2017 from last year
as a government-induced cash shortage hurts businesses, industry
and car sales.
The dent in demand growth in the world's third-largest oil
consumer is expected to be temporary, though, with India still
taking up the third-biggest portion - behind China and United
States - of 2017's rise in fuel use on a barrel-per-day basis,
according to energy consultancy Wood Mackenzie.
India's fuel demand in 2016 grew at its fastest in at least
16 years as low oil prices boosted demand for gasoline and
aviation fuels, but analysts say the nation's currency troubles
will put the brakes on this year.
India's oil product demand growth in 2017 is expected to
drop to 160,000 barrels per day (bpd), from 270,000 bpd in 2016,
according to Woodmac.
"We see Indian demand growth slowing ... due to the recent
currency demonetization drive by the Indian government," said
Suresh Sivanandam, the consultancy's Singapore-based senior
manager of Asia Pacific refining research.
Prime Minister Narendra Modi's currency crackdown has led to
a cash crunch that has severely hurt India's overall output and
consumer demand, with December factory activity contracting in
its biggest monthly decline in eight years and last month's car
sales dropping the most in 16 years.
India's growth in both diesel consumption - used mainly for
heavy industrial vehicles - and gasoline burned to power cars,
is expected to slow, especially in the first quarter, traders
and analysts told Reuters.
And while this will dent refining margins for diesel, it is
not expected to be enough to undercut a strong 2017 profit
outlook for the fuel across Asia this year.
"The cash crunch ... is dampening growth in agricultural and
other small-to-medium scale sectors, which are heavily
cash-reliant," said Sri Paravaikkarasu, head of East of Suez Oil
at energy consultants FGE.
"It will easily take three to six months for the dust to
settle," she said, although long-term prospects remain strong,
with spending on infrastructure projects and a resumption in
economic growth and freight shipments supporting diesel.
Diesel demand is expected to grow only 2 percent in the
first quarter of 2017 compared with a year ago, less than half
of the 5 percent growth rate seen in the first 10 months of
2016, said Tushar Tarun Bansal, director of Singapore-based
consultancy Ivy Global.
Actual oil demand growth may be lower than projected,
though, cautioned an Indian refiner source, as consumers have
been stocking fuel to take advantage of an exception given to
old 500 and 1,000-rupee notes for purchases of diesel and
gasoline at retail pumps.
(Reporting by Jessica Jaganathan; Editing by Tom Hogue)