Bloomberg News

India Said to Consider Doubling ONGC’s Fuel Subsidy Bill

September 20, 2011

(Updates with closing share price in fifth paragraph.)

Sept. 20 (Bloomberg) -- Oil & Natural Gas Corp., India’s biggest energy explorer, may be forced to double the amount it pays to support fuel sales at below-market prices, two people with direct knowledge of the matter said. The shares fell.

India’s government is considering increasing ONGC’s contribution to the fuel subsidy to about 470 billion rupees rupees ($9.8 billion) as it seeks to reduce state spending and rein in the fiscal deficit, 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 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. The government last week deferred its plan to sell shares in ONGC, hampering Finance Minister Pranab Mukherjee’s target of cutting the nation’s fiscal deficit to the lowest in four years.

“Increasing the subsidy payout would mean the share sale plan will have to be put off, probably for a long time,” Deepak Darisi, a Mumbai-based analyst with a “buy” rating on the stock at LKP Shares & Securities Ltd., said today by telephone. “An already ad-hoc subsidy-sharing mechanism is becoming more random. The shares would be hit.”

ONGC declined 3 percent to 261.50 rupees in Mumbai trading, the biggest drop since Aug. 30. The benchmark Sensitive Index gained 2.1 percent. ONGC shares have fallen 19 percent this year.

Tax Cut

The government last week postponed selling a 5 percent stake in ONGC, valued at about $2.3 billion, to raise money to build schools, hospitals and roads. No reason was given for delaying the offer, which was scheduled to start today.

The government plans to cut its fiscal deficit to 4.6 percent of gross domestic product in the year ending March 31. Asia’s second-fastest growing major economy needs to narrow its budget deficit to help curb inflationary pressures, according to the central bank.

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 estimate is based on current crude oil prices and currency rates, the people said.

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

Raised Prices

Prime Minister Manmohan Singh’s government raised prices of diesel, kerosene and cooking gas and cut taxes on fuels on June 25 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.

--With assistance from Unni Krishnan in New Delhi. Editors: John Chacko, Ryan Woo

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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