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Diesel deregulation credit positive for India: Moody's

Moody's said the diesel deregulation will reduce the subsidy burden for the government, although fiscal savings are 'likely to be limited'.

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Updated:October 21, 2014, 6:39 PM IST
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Diesel deregulation credit positive for India: Moody's
Moody's said the diesel deregulation will reduce the subsidy burden for the government, although fiscal savings are 'likely to be limited'.

Mumbai: The decisions to deregulate diesel prices and hike the natural gas prices are "credit positive" as it would bring in fiscal discipline, ratings agencies Moody's said on Tuesday.

"The decision to fully deregulate diesel prices signals fiscal discipline on the part of the sovereign, which we view as credit positive," Moody's Investors Service said in a note.

It said the diesel deregulation will reduce the subsidy burden for the government, although fiscal savings are "likely to be limited".

Total fuel subsidies accounted for less than 1 per cent of GDP in 2013-14.

After a long wait, the government on Saturday deregulated diesel prices and raised the natural gas rates. While diesel deregulation is an important reform initiative, hike in gas prices will directly benefit oil exploration companies.

Another rating firm Fitch said that the decision to deregulate would have a positive effect on the national oil marketing companies.

"The expected direct impact of both the diesel reform and natural gas price hike on Fitch's headline fiscal forecasts is limited, but the fiscal balances will be more robust to future oil shocks, since both diesel and petrol prices are now determined by the market," Fitch said.

It said that deregulation will result in heightened competition for the existing dominant national retailers, and could hurt their profitability over the medium to long term.

"By allowing diesel to be marketed profitably, the sector will once again be attractive for private companies that had left when price restrictions were put in place," Fitch said. Moody's further said that the stable outlook on India's Baa3 sovereign rating is based on expectation of incremental credit positive policy changes in multiple areas over the coming months, and our assumption that the fuel subsidy reforms, which were introduced some years ago, will continue."

Since September 2012, the government has implemented various reforms to the fuel subsidy programme, including allowing oil companies to increase diesel prices incrementally by 50 paise a month, withdrawing the subsidy on diesel sold in bulk, and limiting subsidised consumption of cooking gas.

The oil subsidy bill grew nearly six-fold over the past five years to Rs 85,500 crore in FY'14, from Rs 15,000 crore in FY10.

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