Moody's Investors Service, a global rating agency, has said that as oil prices rise the Indian state-owned companies, Oil and Natural Gas Corporation Ltd. (ONGC, Baa1 stable) and Oil India Limited (OIL, Baa2 stable), face increasing risk that the Government of India (Baa2 stable) will once again require them to share in the country's fuel-subsidy burden.
"Because of the government's widening fiscal deficit, ONGC and OIL could be asked to bear part of the Indian government's fuel subsidy for oil, if prices stay above $60 per barrel for the fiscal year ending March 2019," says Vikas Halan, a Moody's Senior Vice President.
Moody's explains that the two companies have not contributed to fuel subsidies since June 2015, but have in previous years paid for over 40 per cent of the country's annual subsidy bill.
"The net impact of the subsidy sharing will be manageable for ONGC and OIL, even if the two companies are required to bear the entire shortfall between budgeted and actual amounts for the fiscal year ending March 2019," adds Halan.
Moody's points out that if ONGC and OIL are obligated to contribute the entire subsidized amount exceeding the government's budgeted figure for the fiscal year ending March 2019 (fiscal 2019), such a requirement would constrain their net realized prices to USD 52-USD 56 per barrel, which is only marginally lower than or equal to the USD 56 for fiscal 2018.
The agency estimated that fuel subsidies could total INR340-INR530 billion in fiscal 2019, the highest since fiscal 2015, assuming Brent crude oil prices average USD 60-USD 80 per barrel. The government has budgeted for INR250 billion of fuel subsidies in fiscal 2019, leaving a shortfall of INR90-INR280 billion, which could be met by ONGC and OIL entirely, or in part, if the government increases the budget allocation for these subsidies.
As for the oil marketing companies — such as Indian Oil Corporation Ltd (IOCL, Baa2 stable), Bharat Petroleum Corporation Limited (BPCL, Baa2 stable) and Hindustan Petroleum Corporation Ltd. (HPCL, Baa2 stable) — Moody's says that these companies have been asked to share less than 1% of total fuel subsidies since fiscal 2012, and it is unlikely that the proportion of such costs will rise.
On the issue of price deregulation, Moody's says that the government is unlikely to reverse fuel pricing deregulation because it remains committed to reforms.
Moody's notes that most petroleum products are sold at market-linked prices in India, except liquefied petroleum gas and kerosene. Moody's says the government could intervene to address record high prices of petrol and diesel by reducing the excise duty on these products, especially if oil prices stay high. These taxes make up over 20 per cent of the retail selling prices and were increased in 2016 when oil prices fell.