India's government doing the obvious, if not the needful Can you call this a shakedown? Chart and this chunk from SocGen's Kunal Kumar Kundu: As India struggles to keep its finances in order, especially in light of the forthcoming general elections, oil subsidies are proving to be a big drain on resources. Given that a higher fiscal deficit could potentially trigger a rating downgrade, the cash-strapped government is forcing oil companies to share an increasingly higher burden of subsidies in order to keep its deficit in check. And, if the recent announcement by the government (likely to rollover $15bn worth of subsidies to the next budget) is any indication, then oil companies will continue to be squeezed. What did they expect? The government is going to do its damndest to meet its deficit target of 4.8 per cent of GDP in the current fiscal year (however disingenuously) which is being threatened by slowing growth and, erm, "ambitious targets for revenues from privatization and telecoms spectrum auctions" as Eurasia's Anjalika Bardalai put it. Significantly for the oil companies, Delhi's PTBs are under no legal obligation to offer state-owned oil companies compensation. From Bardalai again: As such, the government will likely shift part of its fuel-subsidy burden off-budget, moving it to the balance sheets of the oil companies by once again under-compensating these firms. Taking advantage of its use of cash-basis rather than accrual-basis accounting, the government is also likely to postpone some payments to oil companies to FY2014-15, thus flattering the FY2013-14 expenditure figures. This also impacts, along with the growing NPA issue - Indian banks" gross NPAs touched 3.3 per cent as of March 2013, the highest since March 2005 - pictures of credit growth in the Indian economy. Essentially, oil companies needing to borrow more alongside banks, who are continuing to lend to stressed sectors to keep non-performing assets under control, have muddied the credit picture. Back to SocGen for a touch more detail for those who want it: Between FY06 (April 2005 to March 2006) and FY10, the Government of India started issuing bonds (for oil, food and fertilisers) instead of paying these subsidies to the companies directly. Since there was no direct allocation from the budget, India managed to show a lower fiscal deficit and effectively postponed the burden till the time the bonds would mature. From FY11 onward, India switched from the practice of issuing bonds to direct transfer of cash, which would have a direct impact on the fiscal deficit. From that point on, under-recoveries also started to shoot up. During FY12 and FY13, the government forced the oil companies to bear nearly 40% of the total oil subsidies to prevent a runaway increase in the fiscal deficit. For FY13, the government budgeted 436bn rupees for the oil subsidy but since the under-recovery for the year shot up to 1,610bn rupees, it was forced to raise its share of the subsidy pay-out to 969bn rupees, in keeping with their formula of shouldering 60% of the oil subsidy burden. Although the government assured payment of the incremental amount, it deferred payment to the tune of 450bn rupees to end-May 2013. In essence, the government borrowed from FY14 budget to pay 450bn rupees as a subsidy for FY13. During FY14, the government budgeted 650bn rupees for the oil subsidy, out of which 450bn rupees was paid out as FY13 oil subsidy arrears, thereby effectively leaving a mere 200bn rupees for FY14. According to India's Petroleum Planning & Analysis Cell (PPAC), India's total under-recovery during the first six months of the current financial year was to the tune of 609bn rupees. For the full year, the total under-recoveries are expected at around 1,200bn rupees. Thus, unless the government pays a higher share of the subsidy - which is unlikely given the fiscal stress - then the oil companies will have to share a disproportionately larger share of the oil subsidy burden than the government. With the government likely to rollover a subsidy worth $15bn to next year, financial repression will continue. Related links: India hikes rates another 25bp - beyondbrics Of refining margins and policy mismatches - FT Alphaville India must cut fuel subsidies to turn tide - FT