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The government decision to raise the number of subsidised LPG cylinders to 12 per household a year from a quota of 9 is a populist move that would be credit negative for public sector oil companies, rating agency Icra said today.
The hike in quota is expected to increase the subsidy burden by Rs 5,000 crore on an annual basis and adversely impact retailers Indian Oil, Hindustan Petroleum and Bharat Petroleum which are already reeling under a very high subsidy burden, aggravated by elevated crude oil prices and depreciation of the rupee, Icra said.
Besides increasing the overall subsidy burden, the move could "result in diversion of subsidised LPG to the commercial sector and shift the burden of LPG subsidy on the oil marketing companies (OMCs)," it said.
As per the Ministry of Petroleum and Natural Gas, while 89.2% of the 15 crore LPG consumers use 9 cylinders in a year, if the quota is raised to 12 about 97 per cent of the consumers would be fully covered by subsidised cylinders.
Additionally, the government has also announced that the Direct Benefit Transfer Scheme (DBTS) for administration of domestic LPG subsidy has been put on hold following complaints about its execution and a committee has been formed to look into the same.
Senior Vice President and Co-Head, Corporate Ratings, Icra, K Ravichandran said: "The gross under recoveries (revenue losses) of the OMCs were Rs 100,632 crore during first nine month of 2013-14, while the same are expected to be around Rs 140,000 crore for the full year 2013-14.
"The increase in under recoveries of OMCs coupled with the delays in compensation by Government is likely to strain the already stressed financial position of the OMCs leading to higher requirements of short term debt and higher interest expenses (which are not compensated by the government)."
The current price of LPG cylinder for domestic use is Rs 414 per cylinder in Delhi (with high subsidy of Rs 760 per cylinder), while the LPG prices for commercial purpose is deregulated.
"The earlier lower cap on LPG cylinders had resulted in checking the diversion of the domestic cooking fuel to commercial sector leading to slowdown in the consumption growth of the domestic fuel. However with the increase in the cap, a part of the additional number of subsidised cylinders available to the household may get diverted to the commercial sector," Icra said.
The DBTS for subsiding LPG and Kerosene consumption was a positive