Higher fuel subsidy burden may weaken the credit quality of Indian oil companies for fiscal 2014, says Moody’s Investors Service.
In its sector comment titled ‘Adverse Subsidy-Sharing Formula and Rupee Depreciation Will Weaken Credit Quality of Indian Oil Companies’, Moody’s said“If the Government continues with the same subsidy-sharing formula, as in April-June quarter, then the credit quality of the state-owned oil companies will weaken further.”Moody’s has cited the ongoing depreciation of the Indian rupee and the rising crude oil prices as the reasons for the upward revision of its fuel subsidy estimate for fiscal 2014.
To protect the common man from the impact of rise in international oil prices and the domestic inflationary conditions, the Government continues to control the retail selling price of diesel, kerosene sold under public distribution system, and domestic LPG. This results in oil marketing companies incurring loss on sale of these products. To offset this loss incurred by the oil companies, the Government has worked out a subsidy sharing formula, wherein the marketing companies, upstream companies and the Government shoulder the burden. Minimal burden is shared by the consumers.
“We now expect fuel subsidies for financial year 2014 at Rs 1.4-1.5 trillion (Rs 1, 40,000 crore-Rs 1,50,000 crore), up from the Rs 1.3 trillion (Rs 1,30,000 crore) expected in June 2013,” says Vikas Halan, a Moody’s Vice-President and senior analyst.
“However, in our base case scenario, we continue to expect the Government to fully reimburse marketing companies by the end of fiscal 2014 and reduce the burden on upstream companies,” he added.
The rupee has depreciated by about 10 per cent and the crude oil prices have increased by about 6 per cent since the beginning of June. Moody's projections for the subsidy total assumes that there will be no material change in either the rupee exchange rate or the crude oil price for the rest of fiscal 2014.
Rising subsidy
Accordingly, in Moody’s view, the fuel subsidy for July-September 2013 will likely rise to Rs 350-400 billion (Rs 35,000 crore-Rs 40,000 crore) as compared to Rs 256 billion (Rs 25,600 crore) in April-June 2013.
Total fuel subsidies actually declined in April-June 2013, but because of the way the burden is shared out, the portion borne by the marketing and upstream companies rose overall, while that by the Government fell, according to the report.