Moody's Investors Service, which recently cautioned India on its bleak finances, today said partial de-control of diesel prices will help Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation (IOC) recover Rs 9.60 a litre loss on the sale of diesel over a period of time.
"We view this partial freeing up of diesel prices as a positive step for BPCL and IOC towards recovering the Rs 9.60 per litre loss they incur on the sale of diesel. We expect BPCL’s and IOC’s credit metrics to improve as diesel prices rise," Moody's said in its credit outlook.
While the oil marketing companies are partially, and sometimes fully, compensated for the under-recoveries, there is usually about a six-month delay between the realization of the under-recoveries and the government’s reimbursement of the fuel subsidies, the outlook said.
The ability for companies to at least adjust prices will reduce their use of short-term borrowings to fund the under-recoveries in the interim, and lower their interest expense, which the government does not reimburse, Moody's added.
However, the rating agency did not specify the amount that the government would save due to impact of the move on the subsidy burden. Earlier, Finance Minister P Chidambaram had said that he is not factoring effect of the move on subsidies.
The rating agency, however, said,"This partial deregulation aims to reduce government subsidies paid to the firms and lower the companies’ losses on fuel sales."
Last Thursday, the government authorized the country’s three state-run oil marketing companies – BPCL, IOC and HPCL to raise diesel prices by small amounts of around 50 paise periodically.
The authorisation is credit positive for all three companies because higher diesel prices will reduce the amount of fuel subsidy they need to temporarily absorb until they receive a full or partial payment from the government.
"Although it is unclear how much leeway the companies will get in determining the amount and timing of the diesel price revisions, the authorization marks the first time that they are able to raise prices," the outlook said.
Moody's assigned India the lowest grade in investment category, just like Standard and Poor's (S&P)and Fitch. However, while S&P and Fitch had downgraded outlook on the ratings, Moody's retained it as stable.
However, Moody's found the Centre's finances--fiscal deficit and its debt-to-GDP ratio-- as the weakest aspect of its macro-economic profile.
The Centre's fiscal deficit stood at 80% of the Budget estimates (5.1% of GDP) and if budget projections of 14% growth in nominal GDP is taken it would account for 77% of the revised target (5.3% of GDP). The debt-to-GDP ratio stood at about 70% of GDP.
