Reforms boost Rupee, to help cut subsidy burden further

The benefit for the government and state-owned oil companies from the recent hike in diesel and cooking gas prices could be greater than initially thought.

Oil marketing companies (OMCs) have been projected to see their losses coming down by Rs20,000 crore because of the hikes, reducing the subsidy burden on upstream players and the government.

But the fuel price hikes and other fiscal reforms measures put in motion, such as allowing foreign direct investment in retail, aviation and insurance, have also had a sentimental impact on the rupee, sending it up vis-a-vis the dollar.

To be sure, the local currency has gained 3.68% against the dollar since the fuel price hikes were announced, to 53.38 from 55.42 as on September 13.

And this, say experts, could mean we will end the current fiscal with more or less the same subsidy burden as last year, if not lesser.

“Every one rupee increase in value of the currency against the dollar and decreases the losses of oil marketing companies by around Rs8,000 crore,” said Gagan Dixit, an analyst with brokerage Quant.

Last year, OMCs posted a total loss of close to Rs140,000 crore due to selling of diesel, LPG and kerosene at prices below market. This year, due to an increase in the price of crude oil, which is largely imported in India, and due to a weak rupee against the dollar, the subsidy burden for the year was expected to reach Rs187,127 crore.

“On account of currency appreciation (~4%, Rs53/$) and crude decline (~4%, $110/bbl), under recoveries in the system are likely to reduce by an additional ~Rs19,000 crore, closer to last year’s level of ~Rs138,000 crore,” analysts Deepak Pareek and Dhrushil Jhaveri of brokerage Prabhudas Lilladher said in a note dated September 24.

Upstream companies stand to gain, too, depending on their share in the subsidies. Last year, ONGC, Oil India and Gail shared 80%, 13% and 7% of the under-recoveries of downstream companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum, respectively.

Dixit pointed out, however, that “upstream companies are like state-owned utilities in India as their realisations are capped by the government at some level and hence a clamp on their extent of profits.”

According to him, ONGC, among the biggest companies in India, has seen its crude oil realisation hovering in the $50-55 range per barrel for the last five years and this is expected to continue.

According to data available with the Petroleum Planning and Analysis Cell for the April-June period, the OMCs have so far reported under-recoveries of Rs29,042 crore on sale of diesel, Rs7,274 on sale of kerosene and Rs11,495 on sale of LPG, which totals to an aggregate loss of Rs47,811 crore for the first quarter of the current fiscal.

Analysts say the second quarter figure will also be more or less around the same level as the price hike has been done at the fag end of Q2.

Interestingly, even after the price hike, the OMCs are losing Rs13.86 per litre on the sale of diesel, Rs32.70 per litre on sale of kerosene (its price was left untouched) and Rs347 per cylinder.