Moody's expects govt to reduce fuel subsidy bill

Rating agency says govt's approach will involve staggered increases, similar to the ongoing 50 paise per liter hike in diesel prices every month

Rating agency Moody's expects the government to reduce its fuel subsidy bill through a gradual process that in turn will lead to higher product prices and prove credit positive for oil marketing companies.

"We expect the recently elected government to increase the retail selling prices of controlled fuel products, kerosene and liquefied petroleum gas (LPG) to help control its subsidy burden," Moody's Investors Service said in a report.

It further said the government's most likely approach will involve staggered increases, similar to the ongoing Rs 0.5 per liter hike in diesel prices every month.

"This is because, while a one-time price increase will have a more immediate impact on reducing the burden, it would also be more challenging to push through, given the need to control inflation," it added.

Moodys' added that it also expect the government to be in a position to completely deregulate diesel prices over the next 12 months, as retail prices move closer to international market rates.

The agency expects the loss, or under-recovery, at which diesel, kerosene and LPG are sold will total Rs 1 lakh crore ($18.3 billion) in 2014-2015, if the price of crude oil remains elevated for the rest of year and the government does not increase retail selling prices of LPG or kerosene.

Currently, the government keeps the prices of these three products at below international market prices and compensates retailers for the losses some three to six months later.

The government today hiked price of non-subsidised LPG by Rs 16.50 per cylinder and that of jet fuel by over half-a-per cent after international oil prices surged due to the ongoing Iraq crisis.

Yesterday, petrol price was increased by Rs 1.69 per litre and diesel by 50 paise a litre.