Moody's: India's budget provision insufficient to cover fuel subsidies

Moody's Investors Service says that the fuel subsidy provision in the Government of India's (Baa3 stable) interim budget, announced on Monday, will not be sufficient to fully reimburse the under-recoveries of oil marketing companies (OMCs) including Indian Oil Corporation (Baa3 stable) and Bharat Petroleum Corporation (Baa3 stable).

Moody's estimates India's total fuel subsidy burden at INR1,420 billion for the fiscal year ending March 2014, which it expects will be shared between the government and state-owned upstream oil companies. Excluding the upstream companies' share of fuel subsidies for the full fiscal year, which Moody's estimates at about INR640 billion, the government will need to reimburse OMCs INR780 billion in order to fully compensate them for the under recoveries.

In its interim budget announcement on Monday, the Indian government increased the provision for fuel subsidies by INR190 billion to INR808 billion for the fiscal year ending March 2014. Excluding the INR450 billion paid out to OMCs in the current fiscal year for the previous fiscal year's under recoveries, the budget provision of INR808 billion leaves only INR358 billion for reimbursements in the current fiscal year. This implies a shortfall of INR422 billion.

"Nonetheless, we expect the government to cover the reimbursement shortfall by drawing upon next year's budget and fully reimburse OMCs for fuel subsidies for the fiscal year ending March 2014," says Vikas Halan, a Moody's Vice President and Senior Analyst.

The government has budgeted INR573 billion for fuel subsidies for the fiscal year ending March 2015, which is sufficient to fully compensate the OMCs for the current fiscal year's shortfall. Such adjustments have been made by the government in the past. The situation is more complicated this year with elections in May 2014 that may result in a change in government, which could adopt different policies.

For the nine months ended December 2013, OMCs reported gross under recoveries of INR1,006 billion. After accounting for the INR358 billion of reimbursements promised by the government and the upstream companies' share of INR480 billion, oil marketing companies still have a deficit or net under-recoveries of INR168 billion.

"While we do not expect the government to under-compensate the OMCs, the credit metrics of OMCs will weaken should such a scenario materialize as their profits will decline and borrowings will increase. The extent of deterioration will depend on the reimbursement shortfall," adds Halan.

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