Moody’s Investors Service, which recently cautioned India on its bleak finances on Monday said the partial decontrol of diesel prices would help oil marketing companies (OMCs) Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation (IOC) recover Rs 9.60 a litre loss on the sale of diesel, over a period of time.
“We view this partial freeing up of diesel prices as a positive step for BPCL and IOC towards recovering the Rs 9.60 per litre loss they incur on the sale of diesel. We expect BPCL’s and IOC’s credit metrics to improve as diesel prices rise,” Moody’s said in its credit outlook.
While the OMCs are partially, and sometimes fully, compensated for the under-recoveries, there is usually a six-month delay between the realisation of the under-recoveries and the government’s reimbursement of the fuel subsidies, the outlook said.
The ability for these companies to at least adjust prices will reduce their use of short-term borrowings to fund the under-recoveries in the interim, and lower their interest expense, which the government does not reimburse, Moody’s added.
However, the rating agency did not specify the amount that the government would save due to impact of the move on the subsidy burden. Earlier, Finance Minister P Chidambaram had said that he was not factoring in the effect of the move on subsidies.
The rating agency, however, said, “This partial deregulation aims to reduce government subsidies paid to the firms and lower the companies’ losses on fuel sales.”
Last Thursday, the government authorised the country’s three state-run OMCs — BPCL, IOC and HPCL (Hindustan Petroleum Corporation Limited) - to raise diesel prices by small amounts of around 50 paise periodically.
The authorisation 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.
“Although it is unclear how much leeway the companies will get in determining the amount and timing of the diesel price revisions, the authorisation marks the first time that they are able to raise prices,” the outlook said.
Moody’s assigned India the lowest grade in investment category, just like Standard & Poor’s (S&P) and Fitch. However, while S&P and Fitch had downgraded outlook on the ratings, Moody’s retained it as stable.
However, Moody’s found the Centre’s finances - fiscal deficit and debt-to-GDP ratio- as the weakest aspect of its macro-economic profile.
The Centre’s fiscal deficit stood at 80 per cent of the Budget estimates (5.1 per cent of GDP). If Budget projections of 14 per cent growth in nominal GDP is taken, it would account for 77 per cent of the revised target (5.3 per cent of GDP). The debt-to-GDP ratio stood at about 70 per cent of GDP.
