Fitch Ratings said meeting oil subsidies will be a challenge this fiscal and the government may be forced to roll over around Rs 45,000 crore (Rs 450 billion) to the next fiscal as the agency expects under-recoveries to be around Rs 65,000 crore (Rs 650 billion) this fiscal.
"The government will have to tap around Rs 45,000 crore from next Budget, though we assume that the small monthly increase will continue to happen," Fitch said in a report.
The rating agency said out of the oil subsidies allocation of Rs 65,000 crore in the budget for this fiscal, the government has already given out Rs 45,000 crore to pay oil marketing companies for the subsidy gap incurred in FY13.
"This leaves Rs 20,000 crore (Rs 200 billion) to meet its share of the shortfall between the subsidised price and the market price,” the rating agency said, adding this year’s under-recoveries are expected to be around Rs 45,000 crore.
Net of the discounts from the upstream companies, which has been increased in 2013, the balance cannot be fully accommodated within the remaining Budget allocation, Fitch said.
"The situation is still fluid as to how this year’s subsidy in petroleum products will be shared between the government, the upstream players such as ONGC, Oil India and Gail, and the downstream companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum," Fitch said.
The report further said the government’s ability to pass on sharp petroleum price increases to consumers is likely to be limited in light of the forthcoming general elections.
Fitch said the upstream players are likely to be required to shoulder a greater portion of the total under-recovery.
In the first half of the current fiscal, ONGC and Oil India were asked to pay 52.5 per cent of the total Rs 60,900 crore under-recoveries, compared with less than 40 per cent in previous years.
The report the downstream companies are unlikely to have any heavy burden, given the weakened financial profiles of these entities.
"Yet it is still uncertain as to whether the refining and marketing companies will have to share part of the under-recoveries, as was the case prior to FY12," the report said.
Fitch expects 'the above developments as largely neutral to the standalone credit profiles of the downstream entities, and negative for upstream.'
However, the view may change, especially if subsidy payments are delayed significantly or downstream ends upbearing part of the subsidy burden, Fitch said.