Modi’s Record Win to Help India Curb $24 Billion Oil Subsidy

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, 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, said Narendra Taneja, national convener of the party’s energy division. Implicit in that will be raising prices to spur investment and cut imports that account for 80 percent of the nation’s crude oil and more than 30 percent of its natural gas needs, industry experts say.

“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. “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. ONGC shares in Mumbai increased 12 percent since exit polls on May 12 showed the BJP securing its biggest poll win. Indian Oil climbed 15 percent, while Hindustan Petroleum rose 15 percent and Bharat Petroleum Corp. gained 11 percent. The benchmark S&P BSE Sensex index increased 3.5 percent.

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

Economic Revival

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 party allowed refiners to increase diesel by 0.50 rupees a liter every month until prices reached market levels.

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

Cap on Earnings

While gasoline prices have been freed, the government’s control on diesel and cooking fuels caps the earnings of state-run refiners including Indian Oil Corp. and Hindustan Petroleum Corp. 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 rupees ($10.7 billion), or 45 percent of the 1.4 trillion rupee revenue lost on fuel sales, in the year ended March 31, 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.

Gas Review

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 April 1, 2014, almost doubling rates for the locally produced fuel from $4.2 per million British thermal units. The Election Commission on March 24 ordered the federal 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 cubic meters a day, Mumbai-based IIFL Holdings Ltd. estimates Reliance’s earnings per share will gain by 1.5 percent in the year that began April 1. Each dollar increase in gas prices will raise ONGC’s annual revenue by 40 billion rupees, Chairman Sarraf said on March 25.

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