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To fund part of the oil subsidies bill for this financial year, the Centre would have to depend on its Budget for the next financial year, said rating agency Fitch.
The agency said the government had allocated Rs 65,000 crore for petroleum subsidies in FY14. Of this, Rs 45,000 crore was used to pay oil marketing companies for the subsidy gap in the previous financial year. Fitch said this left the government with only Rs 20,000 crore to meet its share of the shortfall between the subsidised price and the market price (underrecoveries). This was likely to be insufficient, and it was likely the government would have to draw around Rs 45,000 crore from FY15’s next Budget, it added. With the Lok Sabha polls slated for April-May 2014, the United Progressive Alliance government will present an interim Budget early next year. The new government would announce a full-fledged Budget for 2014-15 around mid-2014.
For the first half of this financial year, the total underrecoveries from diesel, kerosene (distributed through the Public Distribution System) and liquefied petroleum gas (LPG) was Rs 60,900 crore. Diesel subsidies accounted for Rs 28,300 crore.
In January this year, the government had announced steps to further deregulate the petroleum sector by allowing diesel for industrial use to be priced at market prices. It had also allowed refining and marketing companies to increase the prices for retail diesel 50 paise a month. This led to a steady decline in diesel underrecoveries. The government also restricted the number of subsidised LPG cylinders (on which it incurred an average subsidy of Rs 408 each) to nine per family, per year. This is likely to reduce subsidy in the LPG segment in the second half of this financial year.
Assuming underrecoveries in the subsequent two quarters is about Rs 40,000 crore each, total underrecoveries in 2013-14 would be Rs 1,40,000. For 2012-13, the figure stood at Rs 161,000 crore, Fitch said.
The agency said upstream players Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) would have to shoulder a greater part of the total underrecoveries. In first half of this financial year, ONGC and OIL were asked to pay 52.5 per cent of the total underrecoveries, against about 40 percent in earlier.
“If the upstream companies bear a larger share of the underrecoveries, the cash flow position of the R&M (refining and marketing) companies would likely improve because the upstream firms are likely to make the subsidy payments faster than the government,” Fitch said. However, if R&M companies have to bear a greater part of the underrecoveries (they bore eight-10 per cent of the underrecoveries in FY10 and FY11), their profitability, liquidity and credit profiles will be hit.
Fitch believes the ability of the state-owned R&M companies to share underrecoveries has declined since 2011, owing to the weakening of their standalone financial strengths.
