The recent decision to increase the number of subsidised cooking gas cylinders per household to 12 from nine has no doubt brought some relief to the middle-class but the cost burden has now fallen on state-backed oil marketing companies (OMCs) and upstream oil companies.
According to the oil ministry, raising the quota would increase the subsidy burden by Rs 5000 crore annually. According to India Ratings and Research report hike in cap could impact the stand alone financial profiles of public sector oil marketing companies in FY15.
On Thursday, government hiked the cap on the number of subsidised cooking gas cylinders and put on hold linking the Aadhaar platform to the subsidy scheme. Most experts term the move as `retrograde’ as it creates additional financial burden for oil companies.
“Given that just around two months are left in FY14, this may not lead to a significant change in the estimated under-recoveries for FY14. However, this raises concerns for FY15, wherein the challenge would be to manage the under-recoveries, especially as household consumption of LPG (liquified petroleum gas) could increase with the increased cap,” the report noted.
Gagan Dixit, an analyst with Quant Capital explained that according to the Interim Report of the task Force on Direct Transfer of Subsidies on LPG, Petroleum and Kerosene released by government in June 2011 at the cap of nine cylinder per year, 89% of people in the country used to get subsidised LPG, which allowed government to save 11% of LPG losses. This saving is likely to reduce to mere 3-4% as higher number cylinders would mean that 95-96% of people will get subsidised LPG, Dixit explained. He further added that higher subsidy burden would mean Rs 150 crore increase in interest cost of three oil marketing companies (OMCs) put together. India Ratings report also points that delays in release of the subsidy, could possibly cause OMCs to take up additional short-term debt to help with cash flow mismatches.
The under-recovery on LPG reached the highest level in FY14 in January at Rs 762.20 per cylinder (average excluding January being around Rs 440 per cylinder). LPG had on an average contributed around 25% to the total gross under-recovery over FY11-FY13 and increased to just above 30% in first half of FY14, with LPG under-recoveries at INR400bn and INR186bn for FY13 and 1HFY14 respectively.
For the OMCs like Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp, the additional Rs 5000 crore subsidy is not likely to accrue before the end of financial year. Deepak Mahurkar, director and leader-oil and gas, at PwC India explained that OMCs do not get subsidy payment expeditiously from government. This adds to the financial burden.
He further said there may not be any immediate impact on upstream companies like ONGC and Oil India, going by the past they might be asked to bear the additional burden. In the current fiscal, upstream companies ONGC and Oil India, along with GAIL (India) Ltd, were asked to bear 60% of the total petroleum subsidy in the April-June quarter, nearly double from 32% a year ago.
ONGC, which bears the highest burden among upstream companies (and not OMCs), has often raised its concern about rising subsidy burden and its impact on its reserves and new investments.