"Budget provision falls short of requirement and we estimate the total fuel subsidy burden at Rs 1,42,000 crore for this fiscal, which we expect to be shared by government and state-owned upstream oil companies.
"Excluding upstream companies' share of fuel subsidies for the full fiscal, which we estimate at about Rs 64,000 crore, government will have to reimburse Rs 78,000 crore to fully compensate OMCs for under-recoveries and this shortfall will have to be covered by drawing upon next year's budget," Moody's said in a note today.
The report further said "excluding the Rs 45,000 crore paid out to OMCs in the current fiscal for the previous fiscal's under-recoveries, the budget provision of Rs 80,800 crore leaves only Rs 35,800 crore for reimbursements in the current fiscal. This implies a shortfall of Rs 42,200 crore, according to our calculations."
Moody's also warned that failure to fully reimburse OMCs will be credit negative. While we do not expect government to under-compensate OMCs, the credit metrics of OMCs will weaken should such a scenario materialise as their profits will decline and borrowings will increase.
"The extent of deterioration will depend on the reimbursement shortfall," Moody's said.
In its interim budget announcement on Monday, the government increased the provision for fuel subsidies by Rs 19,000 crore to Rs 80,800 crore for the current fiscal.
The increased budget provision for fuel subsidies is, however, still insufficient to fully reimburse oil marketing companies for their losses incurred in selling diesel, kerosene and LPG gas at subsidised rates. The Finance Minister has also pushed back Rs 35,000 crore of subsidy bill due this fiscal to the next fiscal.
"Nonetheless, we expect the government to cover the reimbursement shortfall by drawing upon next year's budget and that the three OMCs--IndianOil, Bharat Petroleum and Hindustan Petroleum--will be fully reimbursed for fuel subsidies this fiscal year by reimbursing a whopping Rs 42,200 crore in the March quarter," the report noted.
However, the report noted that budgeted Rs 57,300 crore for fuel subsidies for the next fiscal is sufficient to fully compensate OMCs for the current fiscal's shortfall.
But even though such adjustments have been made by the government in the past, the situation is more complicated this year with elections that may result in a change in government, which could adopt different policies, it noted.
During the first three quarters, the OMCs have reported net under-recoveries of Rs 1,00,600 crore. After accounting for Rs 35,800 crore of reimbursements promised by government and the upstream companies' share of Rs 48,000 crore, OMCs still have a net under-recoveries of Rs 16,800 crore.
"Our base case assumes full reimbursement as we continue to expect government to fully reimburse the OMCs, given their strategic importance to the energy distribution network.