Global credit rating agency Moody's today said that India's fuel subsidies may reach a whopping Rs 1.3 lakh crore in 2013-14, surpassing their earlier estimate that fuel subsidies would fall to Rs 1 lakh crore from a record high of Rs 1.6 lakh crore in 2012-13.
The steep rupee depreciation has negated lower oil prices and the government's reforms, Moody's said in a report on Thursday.
"The Indian rupee has depreciated by 11.8 per cent since the beginning of the fiscal year in April 2013 and reached an all-time low of 60.73 against the US dollar on 26 June 2013. This has negated most of the benefits for the government's budget and the oil marketing companies from the decline in fuel subsidies - in view of price reforms started in September 2012 -- and from a near 8 per cent retreat in crude oil prices on a US dollar basis," Moody's said.
Since September 2012, the government has announced various reforms, including allowing oil marketing companies to increase diesel prices by Rs 0.5 per litre per month, withdrawing the subsidy on diesel sold in bulk (about 16 per cent of the total volume of diesel sold) and limiting the amount of LPG (Liquefied Petroleum Gas) sold at subsidised rates.
The fall in international crude oil prices from an average of $108 per barrel for 2012-13 to $101 per barrel in May 2013 had also helped reduce subsidies.
If the rupee continues to depreciate and averages 62 against the dollar and crude prices increase to average $108 per barrel for 2013-2014, subsidies could return to Rs 1.6 lakh crore, Moody's warned.
Furthermore, in the absence of any further diesel price hikes, fuel subsidies would increase an additional Rs 15,100 crore, Moody's added.
Impact on oil companies
The ratings agency said rupee's depreciation is also negative for the country's state-owned oil marketing companies - Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) - which continue to import about 70-75% of their crude oil needs and rely heavily on foreign currency borrowings, which largely remain unhedged.
Oil marketing companies, which fund the cost of subsidising fuel prices with short-term borrowings until the government reimburses them 6-9 months later, will see their subsidy burden fall by Rs 30,000 crore against Moody's May 2013 estimate of about Rs 55,000 crore in 2013-14. Consequently, their borrowings will fall by around Rs 15,000 crore (equivalent to 6 months worth of subsidy reductions), Moody's said.
However, the rupee depreciation would also result in translation losses on existing foreign-currency borrowings and consequently their balance of foreign-currency borrowings will increase, Moody's said in its report.
"We estimate the foreign-currency borrowings of the three oil marketing companies at $17.5 billion as of March 2013, which translates to around Rs 95,000 crore on the then-current exchange rate (Rs 54.28 per dollar). The same amount of foreign-currency debt would translate into Rs 1,06,200 crore at the current exchange rate (INR 60.73 per dollar), resulting in an increase in debt of Rs 11000 crore," Moody's said.
The rupee on Thursday recovered sharply and was trading at 60.20 at 1:30 pm against Wednesday's close of 60.72 on India's current account deficit (CAD) narrowing to 3.6 per cent of the gross domestic product (GDP), much lower than 6.7 per cent in the March quarter.
"Given that we still expect the absolute fuel subsidy to decline, the state-owned ONGC, which shares about 30 per cent of the fuel subsidy burden, will see its share fall by about Rs 10,000 crore from Rs 49,400 crore in FY13. Based on our previous estimates and before the rupee's sharp depreciation, this decline would have been Rs 18,000 crore," Moody's said.
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