Time to act on Indian fuel pricing and subsidy policy: Fitch

Fitch Ratings today said the central government needed to act on its fuel pricing and subsidy policy now.

In a new commentary, Indian Fuel Pricing and Subsidy Policy: Time to Act, the rating agency noted that while the reluctance of the government to fully pass on the increases in crude oil prices - and the discretionary nature of the subsidy-sharing - was always a concern in the financial profile of downstream public sector companies, the problem was accentuated in financial year 2009 (FY09) due to the significant increase in crude oil prices during the first half of FY09.

Acxcordding to the commentary, this had led to unprecedented losses (under-recoveries) for these companies during this period. Under-recoveries significantly declined after the huge reduction in crude oil prices of over 70 per cent from the peak in the second half of FY09.

Abhinav Goel, director, Fitch Ratings India, says, "Even if the position appears more comfortable than a year ago - from the long-term perspective of liquidity and financial health of the public sector oil companies, the fiscal position of the government, energy efficiency, and energy security - it is imperative that the government of India takes this opportunity to introduce a transparent mechanism to tackle the issue of fuel-pricing and subsidy to avoid a repeat of a 2008-like situation."

The sheer size and timeliness of oil bond issuance and their monetisation created huge spikes in the borrowings of downstream PSCs, and stressed their liquidity.

However, a reduction in under-recoveries from anticipated levels in the second half of FY09 - as well as the issuance of oil bonds - eased the liquidity position of downstream PSCs.