Singapore: India may be forced to raise petrol prices if crude oil costs remain at current record levels, said Montek Singh Ahluwalia, a key economic policy adviser to Prime Minister Manmohan Singh.

Planning Commission deputy chairman Montek Singh Ahluwalia

“If the present crude oil prices continue indefinitely, it will put a heavy burden on subsidies and therefore will have to be adjusted," said Ahluwalia, deputy chairman of the Planning Commission, which suggests policy guidelines to the government. “The really big subsidy source is kerosene and cooking gas."

Manmohan Singh, who runs a 14-party coalition government, is constrained to follow China’s example of raising fuel prices, ahead of state and national elections.

Oil minister Murli Deora said last week a decision on revising local petroleum prices won’t be taken for the next few weeks.

Gujarat and Himachal Pradesh are scheduled to hold elections by next month. General elections are scheduled for around May 2009, barely 18 months away.

Rising prices caused Singh’s Congress party to lose power this year in two states and fall further behind in the most populous province of Uttar Pradesh.

China, run by a single party, the Communist Party of China, on 1 November unexpectedly increased fuel prices by as much as 10% in an “urgent step" to help the nation’s oil refiners cover surging crude costs. The country’s rate of inflation accelerated in October to 6.5% from 6.2% in the previous month.

Manmohan Singh said over the weekend that his government has controlled inflation in India amid a record surge in oil prices. The key wholesale price index is at 3.11%, close to a five-year low.

Ahluwalia said the inflation rate will rise if the higher crude oil prices are allowed to be passed into the economy.

“Since the present inflation rate is low, even if inflation went up to reflect fuel prices, inflation will still be within reasonable limits—and that’s a good reason for raising fuel prices now," Ahluwalia said.

The price for keeping inflation low by not raising fuel prices is higher losses for Indian Oil Corp. Ltd, the nation’s largest refiner, and other state-run companies and a bigger subsidy bill for the government.

At current oil prices, India’s subsidy bill will be Rs68,640 crore this year, the oil ministry estimates. The amount, equivalent to one-10th of the federal budget, is treated as an “off budget" item by the government, meaning it is not included as an expenditure item in the budget. India’s total subsidy bill including food, fertilizer and oil will touch 1 trillion rupees this year, according to government estimates.

The price of crude oil reached $98.62 (Rs3875.7) a barrel on the New York Mercantile Exchange on 7 November, the highest price since trading began in 1983.

“If they remain high, it will be necessary to pass them on rather than subsidize them," Ahluwalia said.

The Reserve Bank of India (RBI), while maintaining its policy rates at a five-and-a-half-year high last month, described the current inflation rate as “suppressed" because it does not reflect the rise in oil price to records.

India’s central bank on 30 October unexpectedly ordered lenders to set aside more reserves for the fourth time this year to contain inflation. RBI governor Y.V. Reddy reiterated the bank aims to contain inflation below 5% by 31 March. BLOOMBERG