Something which may cheer the public Oil Marketing Companies (OMCs), Global ratings agency Fitch underscored that regular increase in diesel price to align it with market will lead to a 25% fall in fuel under- recoveries, difference between the market price and the price set by the government this fiscal, at about Rs 1 trillion.
However, the rating agency emphasized that the only risk to this assumption was sharp rise in the global oil prices. It underlined that production in Iraq, the second largest producer of crude after Saudi Arabia and second largest source of crude for India, could be impacted if the ongoing unrest spreads to southern part of the country. Further, the agency highlighted that it would also like to watch out for policies adopted by the new government and any increase in the share of under-recoveries that upstream companies may have to bear.
Fitch, however ruled out the chances of government hiking the prices of cooking gas and kerosene, on fears of stoking inflation and suggested that re-instatement of subsidy transfers through the direct benefit transfer, halted in March, could reduce the under-recoveries of oil marketing firms and reduce subsidy burden on explorers.
While, on the rating impact, Fitch underscored that the development would definitely bode well for state-run oil refiners and marketers like IndianOil, Bharat Petroleum and Hindustan Petroleum, which though in medium to long term would face the threat of competition from private players, once the diesel prices would fully be de-regulated.
In continuation with the previous UPA government’s January 2013 policy of raising prices in small doses every month to totally clamp down the subsidy, diesel rates too were increased by 50 paise by Modi led government. Despite diesel being hiked seventeen times so far, oil firms are reportedly losing Rs 3.40 on sale of each litre of diesel. Rather, losses have increased from Rs 2.80 a litre earlier this month due to firming up of international oil rates and the rupee depreciating against the US dollar. Besides diesel, the state oil firms lose Rs 33.07 a litre on kerosene sold through the public distribution system (PDS) and Rs 449 per 14.2-kg domestic subsidised LPG (cooking gas) cylinder.
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