Diesel deregulation credit positive for India: Moody's

Fitch also said the decision to deregulate will have a positive effect on national OMCs

The decisions to deregulate diesel prices and increase natural gas prices are “credit positive” as it would bring in fiscal discipline, ratings agencies Moody’s said on Tuesday. It said the diesel deregulation will reduce the subsidy burden for the government, although fiscal savings are “likely to be limited”.

Total fuel subsidies accounted for less than one per cent of the gross domestic product in 2013-14.

After a long wait, the government on Saturday deregulated diesel prices and raised the natural gas rates. While diesel deregulation is an important reform initiative, increase in gas prices will directly benefit oil exploration companies.

Another rating firm, Fitch, said the decision to deregulate would have a positive effect on the national oil marketing companies.

“The expected direct impact of both the diesel reform and natural gas price rise on Fitch’s headline fiscal forecasts is limited but the fiscal balances will be more robust to future oil shocks, since both diesel and petrol prices are now determined by the market,” Fitch said.

It said deregulation will result in heightened competition for the existing dominant national retailers and could hurt their profitability over the medium to long term.

“By allowing diesel to be marketed profitably, the sector will once again be attractive for private companies that had left when price restrictions were put in place,” Fitch said.

Moody’s further said the stable outlook on India’s Baa3 sovereign rating is based on expectation of incremental credit positive policy changes in multiple areas over the coming months, and “our assumption that fuel subsidy reforms, introduced some years ago, will continue.”

Since September 2012, the government has implemented various reforms to the fuel subsidy programme, including allowing oil companies to increase diesel prices incrementally by 50 paise a litre every month.