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The government's latest move to increase the number of subsidised LPG cylinders from 9 to 12 is populist move that would be credit negative for public sector oil companies, rating agency Icra said today.
The move could increase the overall subsidy burden and result in diversion of subsidised LPG to the commercial sector and shift the burden of LPG subsidy on the oil marketing companies (OMCs).
According to Icra, the increase in number of subsidised LPG cylinders from 9 to 12 is expected to increase the subsidy burden by Rs 5,000 crore on an annual basis.
The increase in the cap on number of subsidised LPG cylinders would increase the subsidy burden of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum which are already reeling under a very high subsidy burden that has been aggravated by elevated crude oil prices and depreciation of Indian Rupee.
The GoI on January 30, 2014 hiked the number of subsidized LPG cylinders that a household can avail in a year to 12 from the earlier limit of 9. As per the Ministry of Petroleum and Natural Gas, while 89.2% of the 15 crore LPG consumers use 9 cylinders in a year, if the quota is raised to 12 about 97% of the consumers would be fully covered by subsidised cylinders.
Additionally, the Union government also announced that the Direct Benefit Transfer scheme (DBT) for administration of domestic LPG subsidy has been put on hold following complaints about its execution and a committee has been formed to look into the same. Pending the committee examining the issues, the Aadhar linked LPG subsidy transfer scheme has been put on hold.
K Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, Icra Ltd said, “The gross under recoveries of the OMCs were Rs 1,00,632 crore during the first nine months 2013-14, while the same are expected to be around Rs 1,40,000 crore for the full year 2013-14. The increase in under recoveries of OMCs coupled with the delays in compensation is likely to strain the already stressed financial position of the OMCs leading to higher requirements of short term debt and higher interest expenses (which are not compensated by the government)”.
The current price of LPG cylinder for domestic use is around Rs 414 per cylinder in Delhi (with high subsidy of Rs. 760 per cylinder), while the LPG prices for commercial purpose is deregulated.
Thus, the earlier lower cap on LPG cylinders had resulted in checking the diversion of the domestic cooking fuel to commercial sector leading to slowdown in the consumption growth of the domestic fuel. However with the increase in the cap, a part of the additional number of subsidised cylinders available to the household may get diverted to the commercial sector. Moreover, there will be lesser incentive for the households to resort to fuel conservation measures, says Icra.
The DBT for subsidised LPG and Kerosene consumption was a positive for the OMCs as it was aimed at transferring part of the under recovery burden from the OMCs to the government. However, with the scheme being put on hold, the subsidy burden would fall back on the OMCs.
The DBT was also aimed to eventually move to targeted subsidy for economically weaker beneficiaries and with the move to keep it on hold, the reform will be delayed.
