India boldly scraps oil subsidies

India boldly scraps oil subsidies

By Simon Cameron-Moore

BOMBAY (Reuter): India's opposition parties will be silently
thanking Prime Minister Inder Kumar Gujral for chopping back an
oil price subsidy regime the country could increasingly ill
afford, analysts said on Tuesday.

The United Front minority coalition government had kept
putting off a desperately needed oil price hike while the
opposition crowed over its hesitancy -- until Monday.

The decision to remove diesel from the subsidy scheme,
involving a price increase of more than 20 percent for India's
main fuel, and take out liquefied petroleum gas in two years
time, was bolder than most analysts had expected.

Diesel consumption, at 35 million tons annually, accounts for
around 45 percent of the country's total current petroleum
consumption.

"They have done very well with diesel prices and the plan to
dismantle the administered pricing mechanism (APM) within two
years," said R.K. Pachouri, head of the independent Tata Energy
Research Institute.

The main opposition Hindu nationalist Bharatiya Janata Party
(BJP) and Congress party know putting up prices is no way to get
re-elected, especially in a country used to consumer subsidies.

"Whether it is the BJP or Congress, they'll be making token
noises (criticizing the price increase), but inwardly they will
be relieved," said Subra Subramaniam, director at H.G. Asia.
India is fast becoming one of the world's heaviest oil consumers
as it fuels an economy growing at seven percent a year.

Consumption, put at 77 million tons in 1996/97, is expected to
increase almost 50 percent in the next five years and by 90
percent over 10 years.

Caught by a surge in world oil prices last year, the United
Front delayed putting up domestic prices and endured the
resulting headache for almost all of its 15-month tenure.

It ended up with a $5 billion bill to oil companies, waiting
to be repaid for selling their products below market prices.

The government has wiped out this "oil pool deficit" by
issuing bonds to the companies, and put up prices enough to
ensure that next fiscal year the incremental deficit will
disappear.

The bonds will be unsellable for five to seven years, but can
be used by the companies as collateral to raise loans needed for
the heavy capital investment they need to make to keep pace with
growing market needs.

"If you look at the companies' balance sheets they have a
debt/equity ratio of less than 15 percent, so they have
sufficient room to keep on borrowing even if the bonds have not
solved their cash flow problems," commented Sanjeev Prasad, oil
analyst at Kotak Securities, the Indian affiliate of U.S.
investment house Goldman Sachs.

"There is no problem in terms of financing capital
expenditure," he said.

Most of that investment will be concentrated on the refining
side. Official projections show India expects to import just 11
million tons of refined products a year by the end of 2001,
compared to current levels of 24 million.

The crude import requirement is a wildly different story, with
imports set to grow from 31 million tons to 72 million.

The growing market and deregulation of the sector means oil
firms will see cash tills ring loudly in the coming years.

What the refiners need next is for the government to
rationalize to widen the differential between crude oil and
refined product import duties. Crude duties are currently just
five percent less than the main products, and to create adequate
margins a gap of 10 to 15 percent was needed, analysts said.

Analysts expect the integrated oil companies like Indian Oil
Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd
to clock 100 percent increases in profits in a deregulated
market.

And exclusively refining companies like Cochin Refineries and
Madras Refineries stand to see profits shoot up by 150 to 200
percent once deregulation finally happens.

Politics allowing, that day could come in around three years.
The bureaucrats have plotted the industry's soft landing into a
free market world, the oil companies want it, and it is just down
to the politicians to follow through on reforms.

Central government revenues from the oil sector amounted to
168 billion rupees in the 1996/97 fiscal year, around nine
percent of total receipts.

That dependence on oil for revenue streams may slow any
decision to rationalize import duties, although some analysts
hope Finance Minister P. Chidambaram will take the plunge in next
year's budget.