Despite Petrol Price Hike…
“Though the petrol price hike provides immediate relief to the oil marketing companies, it leaves larger sector issues unresolved”, says Abhinav Goel, Senior Director in Fitch’s Asia Pacific Energy & Utilities team. This also does not change gross under-recoveries as petrol is technically a de-regulated product, and therefore losses on petrol are not added in the gross under-recoveries eligible for government compensation.
Partial de-regulation is compounding the problem of under-recovery by skewing the consumption pattern in favour of diesel, which is highly subsidised. As a result, the consumption of diesel grew at a higher rate of 6.7% during FY12 compared with 5.7% growth in petrol consumption. This reversed the earlier trend where petrol consumption grew at a higher rate (FY11: 10.7%, FY10: 13.9%) compared with diesel consumption (6.5% and 8.9%).
The price differential between petrol and diesel, which was Rs 24.73 per litre (Delhi) before the hike, has increased further to Rs 32.27 per litre (Delhi). Diesel, which accounted for less than 20% of gross under-recoveries in FY10, saw its share increasing over 58% in FY12. Meanwhile, absolute under-recoveries on kerosene and LPG have also been increasing.
“Even if diesel price were to be increased soon after petrol, these fuel price changes would remain ad-hoc in nature and would fail to provide the policy clarity on fuel pricing and subsidy sharing which all stakeholders are looking for”, added Goel.
Policy reforms to improve the timeliness of subsidy transfer to public sector oil marketing companies (OMCs), to prevent spikes in their short-term borrowings, and to rationalise taxes on fuels are other important issues which need to be resolved. To put things in perspective, borrowings of Indian Oil Corporation Ltd. (IOC), the largest OMC, increased to RS 787bn as on end-December 2011 from RS 578bn in end-March 2011, with the short term borrowings accounting for about 70%. Fitch notes that of IOC’s total borrowings around 35% are forex denominated, which could also expose it to rupee depreciation.
While Fitch’s ratings on the Indian national oil companies (IOC, ‘BBB-’/Stable; HPCL, ‘Fitch AAA (ind)’/Stable; GAIL, ‘BBB-’/Stable) are based on the strategic importance of the sector to the sovereign and the strong likelihood of support, and are therefore expected to remain stable, the high subsidy burden and lack of policy clarity do affect the financial flexibility of these companies.