Fuel subsidy was underestimated in Interim budget: Moody’s

Global Rating Agency Moody’s said on Wednesday that Finance Minister P. Chidambaram has underestimated the fuel subsidy bill for the current year in his interim budget by about 40 per cent.

Moody’s estimates India’s total fuel subsidy burden at Rs. 1,42,000 crore for the fiscal year ending March 2014, it said in a statement issued in Singapore on Wednesday.

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,” a 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 in order 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 100600 crore. Of this Moody’s estimates, the deficit or net under-recoveries is Rs 16800 crore.

“While we do not expect the government to under-compensate the OMCs, the credit metrics of OMCs will weaken should such a scenario materialize as their profits will decline and borrowings will increase,” said Mr. Halan.