The move clearly indicates that India is ready to address difficult policy decisions to restore economic growth and stalled capital expenditure cycle, said Abhay Lajjawala, MD and head of research at Deutsche Equities India. He termed the decision as a pragmatic step by the government.
Indian oil, the countrys biggest refiner advanced 6.6% to its highest in more than a year to R315.9 on the BSE. Hindustan Petroleum Corp (HPCL) rallied nearly 6% to close at R345.6, after touching a new 52-week high. Bharat Petroleum Corp (BPCL) and Oil & Natural Gas Corp (ONGC) rallied to their 52-weeks highs before ending the session with gains of about 3.7% each at R395.9 and R314.5, respectively. The sectoral index on the oil & gas companies was the biggest gainer as it rose 3.1% to 279.8, with its biggest component Reliance Industries also progressing 3% to its 52-week high ahead of its December- quarter results.
On Thursday, oil minister Veerappa Moily said the oil companies have been permitted to raise diesel prices by a small quantum periodically till such time they are able to cover R9.60 per litre loss they incur on the fuel. It is estimated that OMCs currently lose close to R9.5 per litre on the sale of diesel at a subsidised price, amounting to about R90,000 crore of total diesel subsidies per year.
According to Motilal Oswal Securities, both upstream and downstream PSU companies will stand to gain as it will reduce their subsidy sharing burden and improve overall cash flows. Edelweiss expects Oil India and ONGC to benefit from the governments move. Although complete de-regulation is still far away, the partial price increases will have market participants factoring higher probability of de-regulation, it said in a note.
It is estimated that diesel subsidies account for close to 1.5% of Indias fiscal deficit.
Indias practice of subsidising retail prices of fuels like diesel acts a a major drag on Budget as it skews the fiscal deficit. India is attempting to meet its targeted fiscal deficit of 5.3% of the GDP for 2012-13 after the same soared to 5.9% of the GDP in the previous fiscal.
The growing fiscal deficit is seen as the biggest risk to Indias sovereign rating. Rating agencies, including S&P and Fitch, have warned of stripping the country of its investment grade credit rating if the government failed to curtail the fiscal deficit.