New Delhi: The government directive to state-owned fuel retailers to subsidise petrol and diesel will have a negative impact on their profitability and credit metrics, Fitch Ratings said .
While cutting excise duty by Rs 1.50 per litre, the government had asked Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) to absorb Re 1 per litre increase in fuel rates.
Fitch, however, said the ratings of the three firms will be unaffected as they are driven by state support. The ratings of BPCL and IOC are equalised with the sovereign, while that of HPCL is aligned with its parent, Oil and Natural Gas Corporation Ltd (ONGC).
“The government reduced the prices of petrol and diesel by Rs 2.50 per litre on October 4, 2018 in response to rapid increases since the start of the year – the diesel price in Delhi, for example, has risen by 27 per cent. “Excise duty on these fuels has been cut by Rs 1.50, but the state oil marketing companies (OMCs) have been directed to bear the cost of the additional Re 1 per litre,” Fitch said.
Fuel prices will continue to be adjusted daily depending on future market moves, but the margins earned by OMCs have effectively been narrowed, which amounts to an implicit subsidy for consumers, it said.
“The fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the weakening rupee,” it said.
“The elections due in 2019 further increase the risk of price controls if crude oil prices continue to rise or the rupee depreciates further. India liberalised fuel prices in 2014 and moved to daily revision in fuel prices in June 2017.
Fitch believes that any further reversal of these fuel-price reforms will be negative for the OMCs’ financial profiles and could affect the investment climate in the sector.
The government has also requested the state governments to cut local taxes to further reduce fuel prices.
“We estimate that the Re 1 per litre cut absorbed by the OMCs will push up their net leverage (net adjusted debt/ EBITDAR) by 0.5x to 1.5x on an annualised basis, with the impact highest for HPCL, given its larger share of earnings from marketing operations.
“In the case of HPCL and IOC, the reduction in profits will add to debt requirements to fund large ongoing capex,” it said.
Rising crude prices and the depreciating currency are also increasing the working capital requirements of OMCs, driving up debt levels. Fitch expects HPCL’s net leverage (including proportionate consolidation of HPCL-Mittal Energy Limited) to rise to 3.0x-3.5x for the year ending March 2019 (FY19) and deteriorate considerably thereafter if the new policy is kept in place through FY20.
This could significantly reduce the headroom available to HPCL’s current standalone profile of ‘BB’.
“We expect BPCL’s net leverage (including proportionate consolidation of Bharat Oman Refinery Limited) to increase modestly to beyond 2.5x and that of IOC to reach 3x during FY19,” it said.
Cabinet clears setting up of centralised GST appellate authority
New Delhi: The Union Cabinet on Wednesday approved setting up of a centralised Appellate Authority for Advance Ruling (AAAR) under the goods and services tax that would decide on cases where there are divergent orders at the state level.
The setting up of a centralised AAAR would require amendments to the GST Acts. The centralised authority as an appellate body will only take up cases wherein the Authority for Advance Ruling (AAR) of two states have passed divergent orders.
The Goods and Services Tax (GST) Council, headed by Finance Minister Arun Jaitley, and comprising state counterparts, in December decided to establish the centralised AAAR.
“The Cabinet has cleared the GST appellate authority,” a source said after the meeting of the Cabinet headed by Prime Minister Narendra Modi.
In view of the confusion created by contradictory rulings given by different AARs on the same or similar issues, the industry had been demanding a centralised appellate authority that could reconcile the contradictory verdicts of different AARs.
Urbanisation to be big driver of Indian economic growth: Kant
Davos: Urbanisation will be a big driver of economic growth in India going forward, supported by favourable macroeconomic factors, accelerated infrastructure building and continuing reforms, NITI Aayog CEO Amitabh Kant said.
Speaking here at an event on sidelines of the World Economic Forum Annual Meeting, he also said the Indian economy may even exceed the IMF growth forecast of 7.5 per cent for the country.
Kant said IMF has forecast 7.5 per cent growth for India despite a gloomy outlook for the global economy and this itself is good, though there are expectations that this estimate would be surpassed. He said India is giving a big push to urbanisation with more than 100 smart cities being developed.
The country is also using technology in a big way to change the way business and governance is done, he added. Besides a massive infrastructure building is happening, bank credit flow has rebounded and macroeconomic factors like inflation and fiscal deficit are also being supportive, Kant said.
DIPP Secretary Ramesh Abhishek noted that states are competing with each other to attract investments and all political parties have adopted the economic reform process. He listed various reform initiatives undertaken in India, including on areas like ease of doing business, FDI, manufacturing and taxation.
They were speaking at Institutional investors’ breakfast roundtable, organised by the industry chamber CII and Kotak Mahindra Bank. Other participants included CII Director General Chandrajit Banerjee and leaders from Indian and foreign companies.
On questions about some persisting issues in doing business including on tax and insolvency related issues, Abhishek said a lot of efforts have been put in to remove all bottlenecks and starting a business doesn’t take more than a day. Besides, special provisions have been made for startups and angel investors, he added.
Kant said efforts are also being made to remove all physical intervention and digitise the entire process of inter-ministerial and inter-department consultations to fast-track the decisions.
India will surpass China, says Raghuram Rajan
Davos: India will eventually surpass China in economic size and will be in a better position to create the infrastructure being promised by the Chinese side in South Asian countries, former RBI Governor Raghuram Rajan said.
Addressing a session on Strategic Outlook for South Asia, Dr Rajan said that the Indian economy would continue to grow while growth rate is slowing down in China.
“Historically, India had a bigger role in the region but China has now grown much bigger than India and has presented itself as a counter-balance to India in the region,” Dr Rajan said at the WEF Annual Meeting 2019.
“India will become bigger than China eventually as China would slow down and India would continue to grow. So India will be in a better position to create the infrastructure in the region which China is promising today. But this competition is good for the region and it will benefit for sure,” he said.
The comments assume significance with China working on a lot of infrastructure projects across the region. In 2017, India became the sixth largest economy with a GDP of $2.59 trillion while China was the second large with a GDP of $12.23 trillion.
At the same session, Nepal PM K.P. Sharma Oli cited collaboration with China as well as India as reasons for the economic growth.