With petrol and diesel prices scaling record highs, S&P Global Ratings on Monday said the government may opt to control retail fuel prices to cushion inflationary shocks.
India imports almost 80 percent of its crude oil requirements. Rising crude prices and the recent 10 percent 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.
Petrol price on Monday crossed the Rs 90-mark in Mumbai, while it was at Rs 82.72 per litre in Delhi. Diesel at IOC's outlets in Mumbai costs Rs 78.58 a litre, while in Delhi the fuel costs Rs 74.02 a litre.
The government freed petrol price from its control in June 2010 and diesel in October 2014. It now provides a limited subsidy on LPG and kerosene.
S&P said amid rising crude oil prices, tight implementation of retail fuel-pricing policies will 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 percent 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 that 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.
"We believe government policy will have a neutral impact on India's state-owned oil marketing companies (OMCs) because we don't expect the government to reinstate refined fuel price controls or a subsidy mechanism," Kulkarni said.India's OMCs comprise Indian Oil Corporation Ltd., Bharat Petroleum Corporation, and Hindustan Petroleum Corporation. Privately owned operations of oil and gas companies include Vedanta Resources and Reliance Industries, S&P noted.