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.
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