Modi govt's fiscal may get a helping hand from cooling crude oil prices

A gradual decline in the global crude oil price, coupled with a phased decontrol of diesel prices since January last year, could bring the fuel’s price to the same level as the market rate before the end of this year.

If that happens, the government-controlled oil marketing companies would be able to lower their borrowings by Rs 10,000-15,000 crore (Rs 100-150 billion) this financial year, and the government’s subsidy burden would come down by about 12 per cent.

According to a Goldman Sachs report, a fall in these companies’ borrowings would bring down their interest expense by Rs 1,000-1,500 crore (Rs 10-15 billion).

Assuming the government funds only 35 per cent of the fuel subsidies, there would be a reduction of $2 billion (Rs 12,000 crore) in the government’s budgetary allocation for oil subsidy and the fiscal deficit if the Brent crude oil price averages $100 a barrel in 2014-15, Deutsche Bank said in a separate report.

“India’s fuel subsidy for 2014-15 is estimated to be Rs 100,000 crore (Rs 1,000 billion) at Deutsche Bank’s Brent crude oil price forecast of $111 a barrel.

"We estimate that a fall of every $10 a barrel in oil price reduces India’s annualised oil import bill by $10 billion and fuel subsidy by $5.6 billion,” the bank said.

The government on Tuesday said revenue loss on sale of each litre of diesel stood at an average Rs 1.78 during the fortnight ended August 16.

Goldman Sachs and Deutsche Bank reports, however, estimated the loss could be less than Rs 1 per litre.

Besides helping the government companies, a market parity in diesel price is seen encouraging private fuel retailers like Reliance Industries Ltd and Essar to consider reopening their outlets, as diesel was their mainstay.

India has been effecting a monthly increase in the diesel price since January last year. Since then, the rates have be raised a cumulative Rs 11.24 a litre in 18 instalments.

After the Brent crude oil price slipped below $100 a barrel and hit a 14-month low on Monday, the shares of state-run oil marketing companies -- IndianOil Corporation, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd --

rose on BSE on Tuesday.

HPCL gained 2.39 per cent to Rs 451.10 a share, while IOC was up 1.6 per cent at Rs 358.2 and BPCL 3.93 per cent at Rs 674.1.

Additionally, Deutsche Bank said falling demand and rising oil supplies was exerting pressure on global oil prices lately.

This happened in spite of an escalation in geopolitical risks.

“Brent crude oil prices have fallen 11 per cent to $102 a barrel from the 2014 high of $115 a barrel,” the bank said.

The bank added a dip in global crude oil prices would help the Indian government save around $8 billion on its import bill.

India imports 85 per cent of its crude oil requirement.

The country’s $95 billion worth of net oil imports accounted for 21 per cent of its total import bill and 64 per cent of its trade deficit in 2013-14.

In a separate note released on Tuesday, Moody’s Analytics said it expected the credit metrics of the oil refiners to improve.

“Over the next 12 months, we expect IOC’s and BPCL’s total borrowings and interest costs to decline in tandem with the decrease in fuel subsidies to Rs 1,00,000 crore (Rs 1,000 billion) for the financial year that ends March 2015, from Rs 1,40,00,000 crore (Rs 140,000 billion) the previous year.

This will result in improved credit metrics for IOC and BPCL,” it said in a statement.

“We anticipate a full deregulation of diesel prices over the next few months, as we expect the newly elected government to continue supporting the price increase of 40-50 paise a litre that has been in place since early 2013.

"Any decision to increase fuel subsidies in India or slow the pace of fuel price deregulation will be credit negative for the refiners,” said Moody’s.

“At present, though the refiners are nearly fully compensated for their underrecoveries, the six-month delay between realisation of the underrecoveries and the government’s reimbursement means IOC and BPCL rely heavily on short-term borrowings to fund the underrecoveries in the interim.

"Also, the government does not reimburse the interest incurred on these loans,” Moody’s added.