New Delhi: Moody’s Investors Service Inc. on Monday said that India’s decision to raise diesel prices was “credit positive” for government-owned oil marketing companies such as Indian Oil Corp. Ltd (IOC) and Bharat Petroleum Corp. Ltd (BPCL).
This comes against the backdrop of the government’s plan for divestment of its stake in companies such as IOC and Oil India Ltd (OIL). Moody’s has a rating of Baa3 on IOC, its lowest investment grade.
The Congress-led United Progressive Alliance (UPA) government on Thursday, removed diesel from its pricing purview in an attempt to bridge the Rs.9.60 a litre gap that oil marketing companies (OMCs) lose on account of having to sell diesel below the actual cost of production. This move along with market pricing of diesel for bulk consumers would result in reducing under recoveries by Rs.15,000 crore annually.
The intent behind the decision was to send out a signal to foreign investors and to rating agencies that were threatening to downgrade India’s sovereign rating because of a widening fiscal deficit.
“The authorization is credit positive for all three companies because higher diesel prices will reduce the amount of fuel subsidy they need to temporarily absorb until they receive a full or partial payment from the government… Typically, the government, the country’s upstream companies—Oil and Natural Gas Corp. Ltd (Baa1 stable) and OIL (unrated)—and the oil marketing companies share the burden of these subsidies to varying degrees,” Moody’s said in its credit outlook report released on Monday.
India has been trying to revive dampened investors’ sentiment amid accusations of policy paralysis. The present outlook for OMCs comes at a time when India’s outlook has been lowered to negative from stable by rating agencies on account of slowing gross domestic product (GDP) growth and lack of credible steps for fiscal consolidation.
“According to the ministry of petroleum and natural gas, the under-recoveries to the three oil marketing companies have been rising over the past three years. For the nine months ended 31 December, diesel composed 59% of the companies’ total under-recoveries of Rs.1.25 billion,” Moody’s credit outlook report said.
Icra in a report dated 18 January had said, “the OMCs are expected to supply diesel to bulk consumers like railways, defence and state transport undertakings at market-determined prices, which would reduce the under-recovery on such volumes (18% of overall diesel sales)…The lower under-recoveries of PSU OMCs (viz. IOCL, BPCL, and HPCL) would significantly decrease the subsidy burden of the government of India and PSU upstream companies on a full year basis, if this is implemented on a consistent basis.”
“Prior to the revision, the total diesel under-recovery in FY 2013 was expected to be around Rs.1,000 billion out of a total of Rs.1,630 billion. Consequent to the decision of the government of India to partly deregulate diesel prices, OMCs increased prices of diesel by about Rs.0.5 per litre, which along with further revisions anticipated would result in marginal fall in their under-recoveries for FY 2013. However, the major benefit of partial deregulation to the fiscal position of Government of India and OMCs is expected to accrue only from FY2014 onwards,” the Icra report had said.