Bloomberg Intelligence: India Budget: Petroleum Impact

Bloomberg IntelligenceIndia’s Budget: Petroleum Impact

India’s budget due Feb. 28 may include details on how to refocus the country’s energy subsidies. This may help reduce the budget deficit while also freeing up funds for India firms to invest in oil and gas exploration and much-needed infrastructure.

The government, trying to sell state assets to cut the deficit, may have to address investor concerns regarding subsidy allocations and natural-gas prices. Investors will be watching for evidence that Modi’s planned reforms are achievable.

India May Ease Energy-Subsidy Burdens on Its Budget, Companies

Lower subsidies on retail fuel in India, which amounted to about 2% of GDP in 2014, would allow the government to channel some of the savings to investments in infrastructure. India also plans to reduce the budget deficit from almost 4.9% of GDP in the fiscal year ending in March to 3.6% in the next year.

Upstream companies such as ONGC and Oil India paid about 48% of the subsidies. They could use funds now allocated to retail payouts on more productive upstream exploration.

Companies Impacted

ONGC and Oil India paid out 48% of the nation’s fuel subsidies in fiscal year 2014 via sales of discounted crude to oil-marketing companies such as BPCL, HPCL and India Oil.

India Counts on `Disinvestment’ to Cut Budget Deficit

India may sell 430 billion rupees ($6.9 billion) of state-owned assets for the year ending in March, according to the Business Standard. By winding down ownership of state assets, India aims to cut its deficit to 3.6% of GDP by the end of the current fiscal year from 5.6% as of March 2014.

The government, which retains at least a 51% stake in all state offerings, has set disinvestment targets each year since 1991. India’s inefficiencies and high levels of state control have limited investor appetite for the stakes.

Companies Impacted

ONGC and Indian Oil are among state energy companies up for sale in the coming years.

Next India Budget Gives Reality Check for Modi’s Planned Reforms

Confidence in Indian Prime Minister Narendra Modi’s energy reforms may be tested against the coming budget. Optimism about his reforms helped drive price-to-book values for the BSE Oil & Gas Index from a low 1.1x in 2013 to a three-year high of 1.6x in 2014.

Building on those valuations will require evidence that reforms are in place, such as easing of fuel subsidies. While declining oil prices have reduced sector valuations, they have also given Modi more room to push for changes.

Companies Impacted

Oil India, Indian Oil, ONGC and Gail are government-controlled oil and gas companies that will be directly affected by sector reforms outlined in this year’s budget.

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