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High oil price: India staring at fuel subsidy burden up to Rs 53,000 crore

   May 22, 2018        962        New Delhi

With global crude oil prices hovering at record high levels, India is staring at a ballooning of fuel subsidies up to Rs 53,000 crore in the current financial year ending March 2019. State-owned Oil and Natural Gas Corp (ONGC) and Oil India (OIL) may have to bear a large part of the burden impacting their financials, according to Moody’s Investors Service.

As the oil prices rise, ONGC and OIL face increasing risk that the government will once again require them to share in the country’s fuel-subsidy burden. “Because of the government’s widening fiscal deficit, ONGC and OIL could be asked to bear part of the Indian government’s fuel subsidy for oil, if prices stay above $60 per barrel for the fiscal year ending March 2019,” said Vikas Halan, Senior Vice President at Moody’s.

The two companies have not contributed to fuel subsidies since June 2015 but have paid for over 40 per cent of the country’s annual subsidy bill in previous years. Halan said the net impact of the subsidy sharing will be manageable for ONGC and OIL, even if they are required to bear the entire shortfall between budgeted and actual amounts for 2018-19.

If ONGC and OIL are obligated to contribute the entire subsidized amount exceeding the government’s budgeted figure for 2018-19, such a requirement would constrain their net realized prices to $52-$56 per barrel, which is only marginally lower than or equal to the $56 for fiscal 2018, according to Moody’s.

High oil price: India staring at fuel subsidy burden up to Rs 53,000 crore
It estimates that fuel subsidies could land in a range between 34,000 crore and Rs 53,000 crore in 2018-19, the highest since fiscal year 2014-15, assuming Brent crude oil prices average $60-$80 per barrel. The government has budgeted for Rs 25,000 crore of fuel subsidies for the current fiscal, leaving a shortfall of Rs 9000-28,000 crore, which could be met by ONGC and OIL entirely, or in part, if the government increases the budget allocation for these subsidies.

On the issue of price deregulation, the top credit rating agency says that the government is unlikely to reverse fuel pricing deregulation because it remains committed to reforms. Most petroleum products are sold at market-linked prices in India, except liquefied petroleum gas and kerosene.

Moody’s added the government could intervene to address record high prices of petrol and diesel by reducing the excise duty on these products, especially if oil prices stay high. These taxes make up over 20 per cent of the retail selling prices and were increased in 2016 when oil prices fell.

Energy World