India’s Biggest Corporate Loss Shows Singh’s Deficit Dilemma

Indian Oil Corp. posted a record quarterly loss after the government failed to compensate it for capping fuel prices, showing the challenge facing Prime Minister Manmohan Singh as he attempts to rein in the nation’s finances.

The state-owned supplier of about 40 percent of the fuels consumed in India reported the biggest loss by any company in the country after selling products including diesel and kerosene below cost.

The pending compensation adds to the high inflation and budget deficit that Singh is grappling with, along with sliding industrial production, a failing monsoon, a declining rupee and the European debt crisis that’s sapped demand for Indian goods. The coalition government has refrained from increasing prices of diesel, the most widely used fuel, for more than a year to prevent protests from its allies and opposition parties gearing up for national elections in less than two years.

“There’s a problem with inflation and we can’t increase fuel prices, and the budgeted amount for subsidy is not enough,” Indian Oil Chairman R.S. Butola told reporters in New Delhi yesterday. “The problems are many, but something will have to be done. The loss is huge.”

Indian Oil’s loss widened to 224.5 billion rupees ($4.07 billion) in the three months ended June 30 from 37.2 billion rupees a year earlier, the nation’s largest company by sales said in a stock exchange filing. Rivals Hindustan Petroleum Corp. and Bharat Petroleum Corp. posted losses of a record 92.5 billion rupees and 88.4 billion rupees, respectively, in the quarter.

Rupee, Crude

Indian Oil is yet to be compensated by Singh’s government for a loss of 174.9 billion rupees from selling diesel, kerosene and cooking gas below cost in the quarter, Butola said. The rupee’s slump in the period increased the cost of purchases for the refiner, which imports almost 80 percent of its oil needs, while Brent crude’s 20 percent decline last quarter lowered the value of its stockpiles by 40.6 billion rupees.

“The $4 billion loss is stunning and staggering,” said Jagannadham Thunuguntla, chief strategist at SMC Global Securities Ltd. in New Delhi. “The oil marketing policy is so complicated that these companies have to live at the mercy of cash compensation policy of the government.”

Indian Oil fell 0.5 percent to 250.35 rupees, the lowest level since June 19, at the close in Mumbai. The stock has declined 1.3 percent this year, compared with a 14 percent increase in the benchmark Sensitive Index.

China, the world’s second-biggest oil consumer, increased retail gasoline and diesel prices for the first time since March starting today after global crude costs climbed. Brent crude oil in London trading gained 7.3 percent in July, the first increase in four months.

Necessary Pain

Indian Oil received 82 billion rupees as a government grant a year earlier. The refiner had debt of 909 billion rupees as of June 30, compared with 754.5 billion rupees on March 31, Butola said.

“Increasing fuel prices will lead to some pain for the people and this pain is a necessary medicine for reviving growth and sustaining the economy,” said Sonal Varma, economist at Nomura Holdings Inc. in Mumbai. “So far, political compulsions have been dominating economic compulsions and it’s time for this to reverse.”

India plans to cut the budget deficit to 5.1 percent of gross domestic product in the year ending March 31, after missing a target of 4.6 percent last year.

High Inflation

Inflation in Asia’s third-biggest economy has stayed above 7 percent since February. Price pressures from a drop in the rupee and the impact of a weak monsoon on crops forced the central bank to leave interest rates unchanged in July, breaking with a wave of cuts in borrowing costs from China to Brazil and Europe.

The rupee fell 8.6 percent against the U.S. dollar in the quarter ended June 30, the worst performer among major currencies in Asia Pacific. It has slumped about 18 percent against the dollar in the past 12 months to 55.285 per dollar.

Manufacturing fell 3.2 percent in June from a year earlier, according to India’s Central Statistical Office yesterday. Mining gained 0.6 percent and electricity output rose 8.8 percent.

Fiscal Deficit

Finance Minister Palaniappan Chidambaram, who was appointed last week, has said he intends to take steps to reverse the slowdown in manufacturing. He also pledged to clarify tax laws and contain the budget deficit as he tries to assuage concern that the nation’s outlook is deteriorating.

India will reassess its fiscal deficit goal for the 12 months that began April 1 after a mid-year review, Chidambaram said yesterday in a written response to questions from lawmakers. Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the gap will widen from 5.8 percent of GDP in 2011-2012.

India’s GDP rose 5.3 percent in the first quarter from a year earlier, the least since 2003. Standard & Poor’s and Fitch Ratings have warned they may strip the nation of its investment-grade credit rating, citing risks including fiscal and current-account deficits.

(Updates with Bharat Petroleum loss in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE