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Modi’s win may help India curtail $24 billion oil subsidy

LiveMint logoLiveMint 20-05-2014 Debjit Chakraborty

New Delhi:Narendra Modi’s sweeping election victory gives him the mandate to accomplish a previously unpalatable change to India’s fuel market—raising prices to cut a $24 billion subsidy bill and shrink the budget deficit.

The Bharatiya Janata Party (BJP), which took more than half the seats in Parliament’s Lower House last week in India’s biggest election win in 30 years, will introduce a new fuel policy as soon as it can form a government. Implicit in that will be raising prices to spur investment and cut imports that account for 80% of the nation’s crude oil and more than 30% of its natural gas needs.

“There’s no reason to believe the government will not free the fuel market,” said B.K. Namdeo, refineries director of India’s third biggest fuel retailer Hindustan Petroleum Corp. Ltd (HPCL). “It’s free from any political pressure, at least for the next three years before it starts looking at the next election.”

Indian energy companies’ shares have surged since Modi’s win. Oil and Natural Gas Corp. Ltd (ONGC) shares in Mumbai increased 12% since exit polls on 12 May showed the BJP securing its biggest poll win. Indian Oil Corp. Ltd (IOCL) climbed 16%, while HPCL rose 14% and Bharat Petroleum Corp. Ltd (BPCL) gained 12%. The benchmark S&P BSE Sensex index increased 3.7%.

“Our financial performance will improve significantly if diesel prices are hiked,” said Dinesh Kumar Sarraf, chairman of state-run ONGC, India’s biggest energy explorer. “The market believes the government will get it done.”

Modi has promised to revive the economy from the slowest pace of growth in a decade and expedite foreign investments in sectors including energy, where the government administers most prices.

“Fuel subsidy is a major drag on the economy,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services Ltd. The outgoing administration of the Congress allowed refiners to increase diesel prices by `0.50 a litre every month until prices reached market levels.

Accelerated price increases are possible. The BJP’s fuel policy will include a diesel component, said Narendra Taneja, national convener of the party’s energy division. Diesel makes up more than half of the fuels sold in the country.

While gasoline prices have been freed, the government’s control on diesel and cooking fuels caps the earnings of state-run refiners including IOCL and HPCL. ONGC gives up almost half of its profit every year in crude oil discounts to state-run refiners to partly compensate them for selling fuels below cost.

The refiners are also reimbursed by the government and themselves assume a portion of the losses. Diesel losses at refiners were `628.4 billion ($10.7 billion), or 45% of the `1.4 trillion revenue lost on fuel sales, in the year ended 31 March, according to oil ministry data.

Refiners in China, the world’s second biggest oil user, are usually allowed to adjust gasoline and diesel prices every 10 working days in line with global crude oil prices.

“The BJP government will focus on boosting domestic oil and gas production to increase security and reduce imports,” according to Grace Lee, an oil and gas analyst for Bloomberg Industries.

“Domestic exploration in India has been deterred by previous government policies, including a requirement for ONGC and other national upstream companies to contribute toward fuel subsidies for end users,” she said in a report.

“The new government will also review the pricing policy of locally produced natural gas,” Taneja said. The Congress government last year approved a new formula for calculating gas prices starting 1 April 2014, almost doubling rates for the locally produced fuel from $4.2 per million British thermal units. The Election Commission on 24 March ordered the oil ministry to defer the increase until polling ended.

The gas price increase will also benefit Reliance Industries Ltd, controlled by billionaire Mukesh Ambani and operator of a field off the nation’s east coast. Earlier this month, Reliance served an arbitration notice on the government, urging it to increase prices.

For every $1 increase in gas prices and at a production rate of 15 million cu. metres a day, Mumbai-based IIFL Holdings Ltd estimates Reliance’s earnings per share will gain by 1.5% in the year that began 1 April. “Each dollar increase in gas prices will raise ONGC’s annual revenue by `40 billion,” Sarraf said on 25 March.

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