Govt may seek to control retail fuel prices to cushion inflationary shocks

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New Delhi: With petrol and diesel prices scaling record highs, S&P Global Ratings on Monday said the government might opt to control retail fuel prices to cushion inflationary shocks.

India imports almost 80 per cent of its crude oil requirements. Rising crude prices and the recent 10 per cent slide in the rupee has translated into higher fuel prices for consumers.

“This puts pressure on consumers and results in higher inflation, a sensitive subject, given the impending federal and state elections over the next 12 months,” S&P Global Ratings credit analyst Vishal Kulkarni said.

“We don’t expect any reversion to the subsidy mechanism similar to before 2014 in India, even though the incumbent government may opt to control retail fuel prices, using other means, to cushion the inflationary shocks,” Kulkarni added.

The US-based agency sa­id it assumes a Brent crude oil price per barrel of $70 for the rest of 2018, $65 for 2019 and $60 for 2020, against the current spot price of almost $80 per barrel in our financial projections. S&P said amid rising crude oil prices, tight implementation of retail fuel-pricing policies would influence the leverage of Indian oil companies.

“While rising oil prices bolster the cash flows of upstream businesses, cross subsidies from upstream to downstream segments could limit such benefits,” Kulkarni said. If downstream companies can’t fully pass-through higher crude oil prices to consumers, profitability could weaken. Their working capital requirements may rise to fund higher-priced petroleum products, he added.

About 30-40 per cent of current retail fuel prices in India are composed of federal and state taxes; a lever governments tend to adjust if crude stays high and some relief in retail fuel prices appears warranted, S&P said.

“Such a tax adjustment, if sought, would also protect the government’s pro-reform stance and the financial health of both upstream oil companies and downstream oil marketing companies. However, it could have some adverse impact on the government’s fiscal deficit,” it added.

It further said the financial health of upstream producers in India could be hurt if the government introduces additional taxes on such companies or a per-barrel levy over a certain price cap.

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