Fuel subsidy bill swells, Moody’s seeks price hikes

Tags: News

LPG, jet fuel prices raised, but govt rules out sharp increases

The government’s under-recovery on diesel doubled a week before the budget while that on kerosene and cooking gas increased substantially following a surge in international oil prices due to the ongoing Iraq crisis.

Global rating agency Moody’s on Tuesday pit­ched for a cut in fuel subsidies by gradually raising prices, but government officials ruled out any sharp increase in fuel prices.

“We expect the government to increase retail selling prices of controlled fuel products, kerosene and liquefied petroleum gas (LPG), to help control its subsidy burden,” said Singapore-based Moody’s vice-president and senior credit officer Vikas Halan.

Moody’s said a reduct­i­on in fuel subsidies thr­ough gradual price hikes would lead to higher prices and this would prove credit positive for oil marketing firms.

Government data released on Monday showed fiscal deficit shot up to Rs 2.4 lakh crore in April-May, accounting for 45.6 per cent of the full-year target, mainly due to higher subsidy outgo.

Government officials clued into the fuel pricing policy ruled out any immediate increase in kerosene and cooking gas prices. They confirmed that the policy of gradual diesel price increase by 50 paise per litre per month would be continued. Petrol price has already been de-regulated and remains linked to global crude price movement, they pointed out.

On Tuesday, the government did raise the price of non-subsidised cooking gas (LPG) by Rs 16.50 a cylinder and that of jet fuel by over half-a-per cent after a Rs 1.69 a litre hike in petrol prices and 50 paise hike in diesel prices on Monday. But that was too little to bridge the gap.

After reviewing the global prices for the second fortnight of June, the petroleum planning and analysis cell on Tuesday said diesel under-recovery rose to Rs 3.40 a litre for the two weeks from July 1 from Rs 1.62 two weeks earlier.

The combined daily under-recovery on the sale of diesel, PDS kerosene and cooking gas stood at Rs 271 crore with effect from July 1 after the price of the Indian crude basket increased to $109.75 a barrel. It was Rs 249 crore for the last fortnight. “The government’s approach will involve staggered increases, similar to the ongoing Re 0.5 per litre per month hike in diesel prices. While a one-time price increase will help reduce the burden immediately, it would be challenging to push through, given the need to control inflation,” Halan said.

The under-recoveries on subsidised kerosene and cooking gas will be Rs 33.07 per litre and Rs 449.17 per cylinder, respectively, in the first fortnight of July, government data showed.

Total fuel under-recoveries are projected to be Rs 91,665 crore in 2014-15 against Rs 1,39,869 crore in the previous financial year.

Moody’s projects that figure to touch Rs 1.1 lakh crore, if crude prices remain elevated for the rest of the year and the government does not increase the retail selling price of LPG.

Halan said the government would be in a position to deregulate diesel price over the next 12 months, as retail prices move closer to international market rates. A reduction in under-recoveries will be credit positive for the three state-owned oil marketing firms, HPCL, BPCL and IOC, as it will reduce the debt required to fund their losses until the government reimburses them.

“While we expect the government to reduce the burden on the two state-owned upstream firms, we also expect the latter — in a scenario where under-recoveries decline — to bear a proportionately higher share of subsidies, as the government significantly reduces its own burden,” Halan said.

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