Analysts have said the recommendation of the Kirit Parikh committee report on fuel prices need to be implemented as a package and not partially. Yet, they also feel the recommendations are too aggressive to be implemented in the current form, given inflation concerns, implementation issues and political considerations.
However, analysts were unanimous that a one-time hike in petrol and diesel prices may happen. The report suggested the government deregulate these, increase the kerosene price by Rs 6/litre and raise it every year, and increase LPG prices by Rs 100/cylinder and revise upward periodically.
However, investment bank and broking firm Morgan Stanley, in its report, observed that if all the price hikes are implemented, the direct impact on inflation would be 1.26 per cent (current inflation is 7.3 per cent). “We believe these policies would be positive if implemented, but in the short term, we expect at least the auto fuel price increases to take place. This should increase direct inflation by 0.23 per cent, taking the breakeven price to $69/bbl. The next step is for the ministry of petroleum to discuss the proposal with the government and set a path for implementation,” the report said.
Goldman Sachs believes partial deregulation of fuel prices would not help oil marketing companies (OMCs), since they remain dependent on state-owned upstream companies and government grants. The government is keen to reduce its own share of subsidies over fiscal deficit concerns and, hence, OMCs have limited scope to earn high profits. “We continue to believe it is unlikely for OMCs to be fully compensated for losses on fuel sales, which the finance ministry has already indicated. Also, the fate of any fuel pricing reform remains hinged to the path taken by international oil prices. Even in China, which has instituted fuel pricing reforms, there is no clarity on fuel prices if oil goes beyond US$80/bbl.
We prefer upstream companies (OIL/ONGC/GAIL) over downstream companies, which have more moving parts like refining margins, high debt. Auto fuel price deregulation, if implemented, would be positive for upstream companies, as they share the entire auto-fuel losses for the OMCs,” says Goldman Sachs’ report.
According to Credit Suisse, the recommendations are a package; partial implementation not a solution “The recommendations of the Parikh committee tie in well together. If all recommendations are implemented, the government would have to bear a fixed amount of subsidy each year, making the system less volatile and government finances more predictable. This is important to ensure PSU company earnings are not uncertain as well.
However, the non-implementation of one key aspect – the deregulation of diesel prices – would destroy this arithmetic. Without free diesel prices, the government faces ballooning funding issues at higher crude oil prices and would again be forced to cut corners in payments to companies. Even partial implementation of some recommendations will go some way in alleviating the stresses in the system and will help assure BPCL/HPCL company earnings if oil prices remain range-bound,” the report mentions.
Edelweiss says the committee has recommended an extreme price hike scenario. With the current high inflation numbers and pressure from the opposition, it may be difficult for the government to increase prices. “On the other hand, we believe that this is the best period (next six months) to increase prices, due to absence of state elections and the fact that the Centre elections are still away (2014),” it said.
CitiGroup, in its report, notes that despite the recommendations being positive in intent, practical hurdles exist, especially with the politically challenging issues of full deregulation of diesel and LPG/kerosene price hikes. Any compromise solution which selectively picks the recommendations and protects consumers could significantly reduce ONGC and OIL’s leverage on crude prices.
