New Delhi: The government is set to raise fuel prices on Monday to cut losses of state oil firms at the risk of stoking inflation further and angering voters but seen helping narrow the fiscal deficit.
A panel of ministers led by Finance Minister Pranab Mukherjee is scheduled to review the heavily subsidised fuel pricing system for Asia’s third-largest economy at 4:30 p.m. (1100 GMT).
The move is keenly watched as an indicator of the Congress party-led coalition’s appetite for financial reforms that entail painful adjustments to freer market. It backed out a few months ago on freeing up farm prices after street protests.
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While lifting price controls could raise the political temperature in India, it was unlikely to threaten the stability of the coalition because the key allies of Congress enjoy powerful ministries they will find hard to give up.
Union petroleum minister Murli Deora made a strong pitch for raising fuel prices ahead of Monday’s meeting, saying it was needed to cut losses of state-run oil companies.
Deora did not give more details but oil ministry officials, who did not want to be identified, told Reuters they favoured a gradual easing of controls, starting with a quick rise in petrol rates to cut subsidies without risking higher inflation.
The ministry wants diesel rates to be gradually increased to market levels and has recommended a small increase in the price of kerosene, used for lighting by the poor, and in cooking gas.
Indian Oil Corp chairman B M Bansal said the state-run firm was suffering a revenue loss of Rs100 crore ($21.2 million) a day on account of low state-set prices.
Deora was sympathetic.
“This is the right time to increase prices because oil companies are losing heavily on fuel sales,” he told reporters.
Raising fuel prices would stoke inflationary pressures, already at levels uncomfortable enough for voters to slam Congress in municipal elections last week in the swing state of West Bengal.
Any decision would be with the approval of Sonia Gandhi, the Congress chief, who is expected to seek a balance between reforms and keeping the coalition stable and voter discontent under control ahead of over half-dozen state elections this year and next.
Oil industry officials say a move to market prices may increase petrol rates by 7% and diesel by about 9%.
The panel of ministers include two members from largest coalition allies Trinamool Congress and Dravida Munnetra Kazhagam (DMK), who face crucial state elections next year and would try to prevent or soften any unpopular hike. Both had opposed an increase in motor fuel prices in February.
Oil ministry officials said they wanted a cautious approach towards diesel prices as it raises transportation costs and has a wider impact on inflation.
“In one stroke we cannot raise diesel prices fully to market levels. Initially, the full burden of higher rates may not be passed on to the consumers,” a senior official in the oil ministry, who did not want to be identified, told Reuters.
Another source said the rates of politically sensitive kerosene and cooking gas may also be raised but state control over prices of these fuels was likely to continue.