Fuel hike to reduce oil subsidy by Rs 25K cr: Crisil

Credit rating agency Crisil today said the government's move to decontrol petrol prices and hike the rates for cooking fuel and diesel will help public sector oil companies reduce their gross under-recoveries by Rs 25,000 crore this fiscal.

It said these steps will positively impact the financial risk profiles of oil marketing companies and gradually pave the way for economic pricing of cooking fuels.

Crisil said, however, that given the sizeable under-recoveries that still exist, an institutionalised mechanism for timely sharing of subsidy will be needed.

Before the hike, the oil PSUs were projected to lose Rs 74,300 crore on selling petrol, diesel, domestic LPG and kerosene below cost in FY2010-11.

Crisil said that with the revision in prices, the public sector oil companies' (PSOC) gross under-recoveries from selling petroleum products below the required price will reduce by about Rs 25,000 crore in 2010-11.

"The price decontrol will eliminate under-recoveries on petrol, reduce under-recoveries on diesel by about 50 per cent (considering the present price increase) and reduce those on liquefied petroleum gas (LPG) and superior kerosene oil (SKO) by about 15 per cent," Crisil said.

It added, "These steps should reduce Indian Oil Corporation's gross under-recoveries by about Rs 13,000 crore and those of Bharat Petroleum Corporation and Hindustan Petroleum Corporation by about Rs 6,500 crore and Rs 5,500 crore, respectively."

Crisil Ratings Director Pawan Agrawal said, "GoI's decision will improve the cash flow position of PSOCs and reduce their dependence on borrowings, though only marginally."

Agrawal added, "Since under-recoveries will remain high even after these steps are initiated, there is a need for creating an institutionalised mechanism to share the burden in a timely manner."

Crisil said either full decontrol -- allowing the PSOCs to decide pricing -- or an institutional mechanism that compensates the PSOCs for under-recoveries in a timely manner, is critical to restore the financial health and credit quality of the oil marketing companies.