The Planning Commission has asked the Ministry of Petroleum and Natural Gas to limit the capacity additions.

"The domestic market is saturated and the infrastructure to export petroleum products is not yet well-established," said a senior official in the Planning Commission.

There may be a saturation in the export market too. With increased competition from China, Japan, West Asian countries and Singapore, the export market is facing a problem of over-supply.

"Moreover, once the domestic gas comes in, there is bound to be some displacement of liquid fuels like petrol, diesel and LPG," the official added.

While private sector entrepreneurs do not need a licence to set up new refineries, the government-owned companies need to get their plans cleared by the Cabinet.

This warning from the planning body could, therefore, impact public sector enterprises more than private players. According to estimates, India's refining capacity is set to rise to 241 million tonnes a year (mtpa) by 2012 from the current 149 mtpa.

After 2012, the country is expected to have another 43 mtpa of capacity. Most of the new capacity is targeted at the export market. In 2007-08, the demand for petroleum products is projected to be at 116 mt while the availability is expected to be 149 mt. By 2012, the demand is expected to rise 13.79 per cent to 132 mt, while the availability is expected to rise 46.30 per cent to 218 mt.

The oil ministry said the value addition in the domestic refineries was about 20 per cent and they generated foreign exchange.

"We are a crude importing country and we need the foreign exchange to buy crude," a ministry official said. India imports around 78 per cent of its crude oil requirement. Imports are expected to go up to around 85 per cent in the next five years if the domestic production does not rise. "This factor needs to be taken care of, and putting up refineries is not the answer," a Planning Commission official said.

Refiners, however, see no serious downsides until 2012. "Beyond 2012, we will need to study the market. Export potential needs to be high before we add any new capacity," said an official with the Indian Oil Corporation, the country's largest refiner. The company is already re-considering expanding capacity of its Panipat refinery to 21 mtpa from 15 mtpa.