New Delhi: India will not increase in diesel prices for now, the oil minister Murli Deora signalled on Wednesday, as the government walks a tightrope between reducing the burden of subsidies and tackling public anger over inflation.
Last week, India deferred a ministerial panel meeting to discuss a possible increase in diesel and cooking gas prices. While oil companies in India can set petrol prices, diesel and cooking fuel are fixed by the state.
Indian oil firms last month raised petrol prices by 5.6%, but increasing diesel prices could have a broader inflationary impact as farmers and manufacturers pass their higher costs along to consumers.
Food inflation has accelerated to a 10 week high of more than 14%, while broader inflation, at 7.48% for November, is expected to quicken in December.
Deora said that the under recoveries on petroleum products for the current year will be around Rs70,271 crore.
“We are trying to see there is no further price hike but if oil prices go further up then something has to be done,” Deora said.
Commenting about the impasse over the mode of payment to Iran, Deora said, “We are trying to sort out the issue and I am very sure that by today or tomorrow it will be done.”
Global crude prices have rallied, and oil steadied to $89.18 a barrel at 010:00 am on Wednesday, after reaching a 27-month high of $92.58 on Monday.
Raising diesel prices could give the opposition another weapon to attack Prime Minister Manmohan Singh’s coalition government, which has been weakened by corruption scandals that stalled parliament’s December session and put reform proposals in Asia’s third-largest economy on hold.
“I think this means they will now review diesel prices only in March and if inflation is within six percent then the prices will be raised,” said D.H. Pai Panandikar, head of private think tank RPG Foundation.
Diesel accounts for one-third of fuel use and is crucial for transportation and the agriculture sector.
Tackling the structure of fuel subsidies would help stock investors value proposed share sales for state-run energy firms Indian Oil Corp and Oil and Natural Gas Corp.
The political tussle over diesel pricing comes as India and Iran try to end a row over payments for Iranian oil supplies.
Iran has offered a stop-gap plan for supplies for January, but a lasting solution to the row over how to pay for future supplies may take weeks.
Deora said he expected a solution soon.
India’s central bank said last week payments to Iran could no longer be done through a longstanding clearinghouse system run by central banks, prompting fears India’s $12 billion annual oil imports from Iran could be threatened.
Iran is India’s second biggest crude oil supplier after Saudi Arabia, accounting for about 13% of its total crude oil imports.
The Indian move came within weeks of US President Barack Obama visiting New Delhi. Washington praised the move, saying it would reduce what it sees is a misuse of funds by Iran to support its nuclear activity, which the West suspects has military aims.
In a bid to hedge itself against supply disruptions from Iran, Mangalore Refinery and Petrochemicals, the biggest Indian buyer of Iranian crude, on Wednesday floated its second tender this week for supply of high sulphur crude oil.
“It’s a very prompt cargo, that shows they are in trouble. Most of the trade for February high sulphur would have been done, given the good premiums most of the grades commanded,” said an Asian oil trader.
MRPL’s managing director U. K. Basu declined comment when asked if the company was seeking high sulphur grades to hedge itself against any supply disruption from Iran.
If the impasse continues it could hit Indian imports of 400,000 barrels per day of Iranian crude oil, forcing India to look for more expensive alternatives that would swell its already high current account deficit.
India also fears that rival China would step in and buy Iranian crude that is now shipped to India.
Utpal Bhaskar also contributed in this story