Before the Gujarat and Karnataka state elections, the government had asked oil companies to temporarily suspend the practice of adjusting the prices of petrol and diesel on a daily basis.

"Given India's upcoming general election in April-May, we expect the refiners' profitability may come under pressure if they are asked by the government to temporarily freeze the prices of petroleum products," Moody's said in a report.

The BJP-led NDA, if voted back to power, could allow oil companies to recover their losses post elections as it has done in previous state-level elections, it said.

"A change in government may expose the oil companies to a new set of challenges that are harder to anticipate because the oil and gas sector policy of other parties contesting in the elections is not yet clear."

State-owned IOC, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) had temporarily stopped revising fuel prices first in December 2017, ahead of assembly elections in Gujarat and then in April/May 2018 before Karnataka elections.

So far, they have continued to change prices on a daily basis.

Moody's expects India's state-owned oil companies will continue to pay high dividends in the next fiscal year, which will be negative for refiners but the oil producers will not be as significantly affected.

In a report on the country's state-owned oil and gas companies, Moody's said: "High shareholder returns will increase the oil companies' aggregate borrowings and constrain their credit profiles."

It expected Oil and Natural Gas Corp (ONGC), IOC, Oil India Ltd (OIL) and BPCL to maintain high dividends payments as well as conduct share buybacks in fiscal 2020.

"High dividend payments will further stress the refiners' credit metrics at a time when refining margins have weakened and capital spending is high. We expect the regional refining margin, which has weakened significantly since June 2018, to meaningfully improve only in the second half of 2019," it said.

Refiners IOC and BPCL also need to invest in upgrading their refineries over the next 12-18 months to comply with tighter emission norms.

IOC, it said, is better positioned than BPCL to maintain its credit quality given its large scale and stronger credit metrics.

Moody's said despite the increase in dividends and share buybacks by the upstream companies ONGC and OIL, their total outflow to the government has significantly declined since 2015, because they have stopped sharing the country's fuel subsidy burden.

The companies will continue to invest in exploration and development activities, which will likely be funded with retained cash flow. As a result, their borrowings are unlikely to increase meaningfully.

Dividend payments will remain at a similar level in fiscal 2020 but share buyback amounts will likely fall as the oil companies' reduce their cash balances so that they do not qualify for share buybacks under the capital restructuring guidelines issued by the Department of Investment and Public Asset Management in May 2016, it said.

ONGC and IOC are unlikely to conduct further share buybacks in fiscal 2020 as there needs to be at least a 12-month gap between two share buybacks. Both firms conducted buybacks in the current fiscal.

As per policy, all government-owned companies have to pay a minimum dividend of the higher of 30 per cent of the net income or 5 per cent of net worth. In addition, government-owned companies should look to pay maximum dividend permissible by law.

These firms have to conduct share buybacks if both net worth exceeds ₹2,000 crore and cash and bank balances exceed ₹1,000 crore.

Moody's said the oil companies' shareholder returns will provide the Government of India with the cash to meet its fiscal deficit target.

"The government has been increasing its reliance on the oil and gas sector as a source of revenue over the years. As oil prices fell in early 2016, the government imposed taxes on the production of petroleum products which accounted for about 24 per cent of government revenue for fiscal 2018.

"Following the recent increase in oil prices, the government had to cut these taxes to limit the impact of high prices on consumers in India. We believe the government is unlikely to raise these taxes so close to general elections in April and May 2019 because the taxes are ultimately passed on to end consumers," it said.

And so, dividend payments and share buybacks by the oil companies will continue to be a source of revenue for the government.

"High shareholder returns – because of government policy -- will increase the oil companies' borrowings and constrain their credit profiles, and upstream companies will be better positioned than the refiners to maintain credit quality," said Vikas Halan, a Moody's Senior Vice President.