With diesel price deregulation likely at some point this fiscal, high subsidies on LPG and kerosene will continue to be a major challenge, ICRA Research said on Monday.
With the BJP-led government continuing with the previous government's decision of raising diesel prices by up to 50 paisa per month, "the retail price of diesel could get aligned with the market determined prices within FY15 barring a spike in crude oil prices or depreciation of the rupee versus the US dollar," it said in a statement.
Despite reduction of subsidy on diesel, the gross under recoveries in 2014-15 are expected to remain high because of domestic cooking gas or liquefied petroleum gas (LPG) and PDS kerosene.
Under-recovery is the difference between the actual cost and retail selling price.
"Gross under recoveries in FY15 are expected to remain high owing to the large under recoveries on the sales of LPG (domestic) and PDS Kerosene with the under recoveries of the former forming the major chunk of the gross under recoveries," it said.
The decision to raise cap on supply of subsidised LPG cylinders to 12 per annum from 9 and keeping direct benefit transfer scheme on hold have also led to the high subsidy burden of domestic LPG.
"The LPG demand growth is expected to remain high due to increased cap of subsidised cylinders, which tend to encourage the diversion of domestic LPG for Auto-LPG and commercial LPG purposes (where prices are deregulated and almost double that of subsidised domestic LPG)," ICRA said.
According to K Ravichandran, Senior vice-president and co-head, corporate ratings, ICRA, the under-recovery on domestic LPG have more than doubled to Rs 46,500 crore in 2013-14 from Rs 19,500 crore in FY'11 following robust demand growth of 5-9 per cent.
ICRA Research expects the share of domestic LPG in total under-recovery to increase from 25 per cent in FY 13 and 33 per cent in FY14 to about 46 per cent in current fiscal.
The LPG subsidies, in absence of any price hike, are projected to increase to Rs 48,000-54,000 crore in current fiscal.
"At current level of Indian Basket crude of $110-111 per barrel and rupee-dollar exchange rate of 60, the LPG retail prices may need a retail price hike (excluding taxes) of Rs 40-45 per cylinder to keep the LPG under-recovery of FY 15 at the similar level of FY 14," he said.
ICRA Research projected that the total gross under recoveries in FY15 to be in the range from Rs 95,000 crore to Rs 150,000 crore.