Global Rating Agency Moody’s, on Wednesday, said Finance Minister P. Chidambaram had underestimated the fuel subsidy bill by about 40 per cent for the current year in his interim budget. The rating agency estimates India’s total fuel subsidy burden at Rs.1.42 lakh crore for the fiscal year ending March, 2014, it said in a statement issued in Singapore.
The revised estimate in the Interim Budget is Rs.85,480 crore. “The provision in the Government of India’s Interim Budget, announced on Monday, will not be sufficient to fully reimburse the under-recoveries of oil marketing companies (OMCs), including Indian Oil Corporation and Bharat Petroleum Corporation,” Moody’s Vice-President and Senior Analyst Vikas Halan has reported.
Excluding the upstream companies’ share of fuel subsidies for the full fiscal year, which Moody’s estimates at about Rs.64,000 crore, the government will need to reimburse the OMCs Rs.78,000 crore to fully compensate them for the under recoveries, the statement said. These state-owned companies are compensated as the administered prices of fuels are pegged below market prices to subsidise consumers.
The Interim Budget provided Rs.45,000 crore as reimbursements paid out to OMCs for the previous fiscal year’s under recoveries. “Nonetheless, we expect the government to cover the reimbursement shortfall by drawing upon next year’s budget and fully reimburse OMCs for fuel subsidies for the fiscal year ending March, 2014,” said Mr. Halan.
Though such adjustments have been made by the government in the past, the situation is ‘more complicated’ this year as the elections in May could result in a change in polices by the next government. For the nine months ended December, 2013, OMCs reported gross under recoveries of Rs. 1 lakh crore. Of this Moody’s estimates, the net under-recoveries are Rs.16,800 crore.
“While we do not expect the government to under-compensate the OMCs, the credit metrics of OMCs will weaken should such a scenario materialise as their profits will decline and borrowings will increase,” said Mr. Halan.