The loss has fallen to 0.08 rupees (less than 1 U.S. cent) a liter from 13.4 rupees in September last year after Modi continued with gradual price increases that began in January 2013, Oil Ministry data show. The ministry will seek Cabinet approval to remove diesel controls once losses end, one of its officials with direct knowledge of the matter said last week, while requesting anonymity citing rules.
Modi is vying with counterparts including Indonesian President-elect Joko Widodo to woo investors by curbing petroleum subsidies, which frees up funds to invest in infrastructure for faster growth. The government and state-run crude producer Oil & Natural Gas Corp. (ONGC) bore the brunt of the 4 trillion-rupee cost of cushioning diesel in the last 10 years.
“For all practical purposes, diesel prices are now deregulated, and the government may formalize it,” Vikas Halan, a senior credit officer at Moody’s Investors Service in Singapore, said in an interview. “It will be a big step. If diesel deregulation is formally announced that would be de-risking the fuel subsidy bill for the future.”
An end to price controls would benefit state refiners Bharat Petroleum Corp. (BPCL), Hindustan Petroleum Corp. (HPCL) and Indian Oil Corp. (IOCL), as well as ONGC, by allowing them to charge more for their products, according to Ambit Capital Pvt.
The potential shift, a 7.4 percent drop in Brent crude prices and a 2.4 percent climb in the rupee against the dollar in 2014 have sparked a share-price surge in all four companies. A stronger rupee helps curb the cost of commodity imports.
Bharat Petroleum is up about 101 percent this year, Hindustan Petroleum 97 percent, Indian Oil 80 percent and ONGC 51 percent. That compares with the 28 percent increase in the benchmark S&P BSE Sensex (SENSEX) equity index.
The refiners are also required to sell cooking gas and kerosene below production costs to keep prices affordable in a nation where 827 million people live on less than $2 per day.
Modi swept to power in a landslide election victory in May, after pledging to increase energy production and revive investment to raise the pace of growth from near a decade low.
Another goal is to narrow the budget deficit to a seven-year low of 4.1 percent of gross domestic product in the fiscal 12 months that began April 1.
“It’s really important to cut fuel subsidies,” said Lutz Roehmeyer, who manages $1.1 billion of emerging markets debt, including Indian Oil bonds, at Landesbank Berlin Investment GmbH in Berlin. “It would have a meaningful impact on the bottom line in the federal budget. It’s also necessary because peer countries are discussing similar steps.”
Widodo is considering raising subsidized fuel prices as early as next month, Arif Budimanta, a member of his economic team, said Sept. 2 as the incoming leader tries to free up state funds to invest in Southeast Asia’s largest economy.
Indonesia earmarked $24.9 billion for fuel subsidies in its 2015 budget. India’s government alloted 634.3 billion rupees ($10.5 billion) for petroleum subsidies, which include diesel, cooking gas and kerosene, in the current fiscal year.
In India, the government plans to ask ONGC and Oil India Ltd. (OINL) to cut their share of the total petroleum subsidy payouts to 50 percent, with the state taking on the other half, a draft proposal seen by Bloomberg News shows.
Splitting the subsidies would improve the companies’ profitability, Moody’s said on Sept. 1. ONGC’s revenue and operating cash flows would increase as much as 195 billion rupees in the year ending March 2015, while Oil India’s would rise as much as 18 billion rupees, Moody’s said.
ONGC would be the biggest beneficiary if subsidies are removed because it bears a large part of the burden, Aloke Kumar Banerjee, the company’s finance director, said Sept. 2. The explorer last month said it sold oil at $47.15 a barrel in the quarter ended June 30 after giving a discount of $62.33.
India’s government could potentially end fuel subsidies by 2020 with “proactive” decisions to align domestic prices with market prices, Deutsche Bank AG said Sept. 1. A “negligible fuel subsidy environment” would help divert almost $18 billion for areas such as infrastructure, it said.
While India has made progress on diesel, Modi budgeted for a 2 percent increase in total subsidies, including for food and fertilizer, to 2.6 trillion rupees this fiscal year.
Analysts at banks including Deutsche Bank and Nomura Holdings Inc. saw his first budget on July 10 as a missed chance to take tough measures on the payments. The premier is banking on higher revenues to pare the fiscal gap.
Ending diesel subsidies “will be an important step by the government to cushion the fiscal deficit,” Sonal Varma, an economist at Nomura in Mumbai, said Sept. 2. “This is the best time for deregulating the fuel without a political backlash as oil prices are relatively low.”
Brent crude, a benchmark for more than half of the world’s oil, fell to $100.34 a barrel on Sept. 2, the lowest since May last year. It averaged about $107.94 a barrel so far this year compared with $108.70 in the whole of 2013.
Diesel in India is used in everything from cars and trucks to back-up power generators and agricultural water pumps. The fuel accounts for 43 percent of Indian petroleum consumption.
Controls on petrol prices were removed in 2010 by the previous Manmohan Singh-led government, which in January 2013 began monthly increases of 0.5 rupees a liter in diesel tariffs.
Modi avoided “cheap popularity” by continuing the policy, said Lalit Kumar Gupta, managing director at Essar Oil Ltd. in Mumbai. “Now we have to wait and see when free pricing kicks in.”