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The government's move over the weekend to raise fuel prices and cut taxes on crude oil and petroleum products saw the oil pack being the toast of markets in Monday's trade. Both the upstream and downstream oil companies registered handsome gains ranging three to six per cent, compared with the less than one per cent rise in the Sensex.
While a price hike in diesel was widely expected, the increase in prices of kerosene and LPG, and also reduction in customs duty on crude oil and petroleum products, and excise duty on diesel seems to have come as a positive surprise for the oil companies. Pushed to the wall by a clearly unsustainable under-recovery situation with crude oil consistently ruling over the $100 a barrel mark, the government was finally forced to bite the bullet. This was notwithstanding risks of further stoking already high inflation levels and a danger of the tax cuts jeopardising the targeted fiscal deficit.
Easing pressure
From the point of view of the oil companies, it was a case of better late than never. These moves should see pressure on their financials ease considerably, with the under-recoveries for FY-12 estimated by the oil companies to fall to Rs 1,22,000 crore from the earlier estimate of around Rs 1,70,000 crore. These estimates may be over-stated due to the trade parity based calculation mechanism, but these are the only available official numbers.
Subsidy worry
Concerns, however, remain. Even at present levels, under-recoveries for the current fiscal are likely to be higher than the previous all-time high of around Rs 1,03,000 crore seen in FY-09. At around Rs 6 and Rs 25 a litre on diesel and kerosene respectively, and at Rs 354 a cylinder of LPG, under-recoveries still remain uncomfortably high.
Adding to these concerns is the continued uncertainty about the subsidy sharing mechanism. The ad hoc increase in the share of burden to be borne by upstream companies in FY-11 from 33.3 per cent to 38 per cent, despite assurances to the contrary, led to a lot of negativity among investors. With the budget grossly under-providing (Rs 23,640 crore) for the current fiscal's under-recoveries, it remains to be seen how the pain is finally distributed when the books are closed. For the moment though, something seems to be better than nothing for the beleaguered oil companies. With the Petroleum Minister candidly admitting that he is sandwiched between economists and populists, this is perhaps the best they could have hoped for in the present circumstances.
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