Cautioning the government against roll back of diesel price hike, credit rating agency Moody's on Thursday said that any such step would limit its subsidy reduction plan.
"If the government rolls back a part of the hike, as some coalition partners and members of opposition parties have demanded, the decline in subsidies will be smaller," Moody's said in its credit outlook report.
Battling huge fuel subsidy payout, the government last week raised diesel prices, first since June 2011, by Rs 5 a litre.
Moody's statement comes on a day when opposition parties are observing nation-wide strike to protest against the price hike and government's move to operationalise its decision on allowing foreign direct investment in multi-brand retail.
Moody's said the price hike would lower government'ssubsidy burden by Rs 20,000 crore (Rs 200 billion) in the current fiscal to an estimated Rs 1.7 lakh crore.
"Still, the subsidy will be 23 per cent higher than the Rs 1.4 lakh crore (Rs 1.4 trillion)
Moody's said since June 2011, import parity prices, which are used as a reference to calculate the subsidies, have risen by nearly 25 per cent because of higher international diesel prices and the depreciating rupee.
"But the near double-digit domestic inflation and the political consequences of pushing through unpopular reforms have kept the frequency of price hikes low," it added.
Moody's said the price hike is credit positive for oil marketing companies.
"The initiatives are credit positive for state-owned oil refining and marketing companies, including IOC and upstream oil companies, including ONGC," he said.
The government usually distributes subsidies to state-owned oil refining and marketing companies with a lag of up to six months.
In the interim, companies such as IOC need to raise money to cover the cost of the subsidy.