Criticising India?s oil subsidy policy, Fitch Ratings has said shifting the burden of high oil prices to future generations was unsustainable both for the government and state-run oil marketing companies.
India has not allowed its oil marketing companies?Indian Oil, Bharat Petroleum and Hindustan Petroleum to completely pass on the impact of high global oil prices to consumers and instead compensates them through a mix of oil bonds and subsidy from firms like ONGC. ?Higher world oil prices coupled with increasing demand in India have led to a situation where the oil subsidy policy?the way it is currently practiced in India?is becoming unsustainable,? Fitch said in its report released on Wednesday.
Compensating retailers by way of oil bonds tantamount to passing on the burden to future generations. ?The policy of shifting the burden of today?s subsidy to future generations should not continue unabated. Even if oil prices decline in the short term, it will not obviate the need for a more far-sighted energy pricing and subsidy policy,? Fitch Ratings India director Abhinav Goel said.The oil subsidy policy not only affects the liquidity position and financial health of the retailers but also impacts the fiscal position of the government itself, which is likely to deteriorate if off-budget subsidies (oil bonds) are accounted for on-budget.
Fitch estimated fall off-budget subsidies were accounted for on-budget, the general government deficit would approach 9 % of GDP in 2008-09. ?The current fiscal stance puts at risk much of the fiscal improvement that has taken place over the last few years.? ?The changed market scenario requires a serious re-think from a policy perspective, keeping in mind the broader issues of liquidity and financial health of the oil companies, the fiscal position of the government, energy efficiency and energy security,? Goel said.
Moreover, the current subsidy policy does not take into account long-term issues such as the fair price for energy consumption to ensure efficient utilisation of scarce resources, and the financial capability of IOC, BPCL and HPCL to create refining assets in line with the growing consumption.
It also undermines the plans of these companies to make any progress in attempt to acquire interest in upstream assets. Subsidy-sharing by upstream firms means that they are at a relatively disadvantageous position vis-a-vis international companies which are reaping the huge windfall of the price of crude oil, Fitch said. Since 2005-06, the Centre has announced an ad-hoc support mechanism under which subsidies are shared by upstream firms through discounts on domestic crude oil supplied to public sector refiners; by the state through oil bonds; and the balance by the downstream PSCs.