India Government Said to Consider Almost Doubling ONGC’s Fuel Subsidy Bill By Rakteem Katakey and Anto Antony - Sep 19, 2011

India’s government is considering almost doubling Oil & Natural Gas Corp.’s share of fuel subsidy to cut expenditure and reduce the fiscal deficit, two people with direct knowledge of the matter said.

The country’s biggest energy explorer may pay about 470 billion rupees ($9.8 billion) as the government-mandated subsidy in this financial year, one of the people said, asking not to be identified because the details are private. The New Delhi-based company paid 248.9 billion rupees as subsidy in the year ended March 31, according to a May 30 stock exchange filing.

ONGC supplies crude at a discount to state-owned refiners to partly compensate them for selling diesel, kerosene and cooking gas below cost and its share of subsidy rises when the cost of oil climbs. Asia’s second-fastest growing major economy needs to narrow its budget deficit to help curb inflationary pressures, according to the central bank.

“An already ad-hoc subsidy-sharing mechanism is becoming more random and we don’t know what to expect from the government,” said Deepak Darisi, a Mumbai-based analyst with LKP Shares & Securities Ltd., who has a “buy” rating on the stock. “If the government finalizes this, the stock would fall way below current levels.”

The government last week deferred selling a 5 percent stake in ONGC, valued at about $2.4 billion, to raise money to build schools, hospitals and roads. No reason was given for delaying the offer, which was scheduled to start today.

ONGC declined 1.9 percent to 269.45 rupees in Mumbai yesterday. The stock has dropped 16 percent this year, compared with an 18 percent fall in the benchmark Sensitive Index.

Tax Cut

The selling price for ONGC’s crude produced in India may fall to about $42 a barrel if the subsidy bill rises to 470 billion rupees, one of the people said. The subsidy burden is based on current crude oil prices and currency rates, the people said.

Finance Ministry spokesman D.S. Malik declined to comment on the subsidy. ONGC hasn’t received information from the government on subsidy payments and cannot comment, the company said in an e-mail.

Prime Minister Manmohan Singh’s government raised prices of diesel, kerosene and cooking gas and cut taxes on fuels on June 25 to reduce the subsidy burden as crude oil costs rose. The price increase is estimated to have narrowed the loss of revenue for state refiners to about 1.2 trillion rupees for the year from 1.71 trillion rupees, according to a June 24 oil ministry statement.

The government may consider the 490 billion rupee loss of revenue from the tax cut as subsidy, one of the people said.

Indian Oil Corp., the country’s biggest refiner, raised gasoline prices Sept. 16 as losses from selling fuels below cost increased after the rupee declined to a two-year low against the dollar.

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Anto Antony in New Delhi at aantony1@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net
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