New Delhi: The government on Wednesday allowed oil marketing companies to raise the retail price of kerosene by 25 paise a month for 10 months in an effort to narrow losses from selling the fuel below market price and discourage the diversion of subsidized cooking fuel for adulterating diesel.

“A 25 paise increase in kerosene price increase is being implemented. We have advised state governments to issue price notifications in this regard," said a spokesperson for one of the state-owned refiners. Unlike petrol and diesel, which are directly sold by retailers Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL), kerosene is sold through the public distribution system (PDS) of state governments.

States are yet to notify the price increase.

It is estimated that due to the difference in the market price and the price at PDS outlets, about 40% of the subsidized kerosene is diverted for adulterating diesel. The oil ministry had said in January that the allocation of 8.68 billion litres of kerosene to states in 2015-16 was more than the 7.13 billion litres reported by the National Sample Survey 2011-12, despite improvements in village electrification and the higher use of LPG for cooking, indicating its diversion.

The spokesperson said the intention is to sell kerosene at the international price and to directly transfer the subsidy to customers’ bank accounts. This will be done through scaling up the pilot projects being instituted in 26 districts across eight states: Chhattisgarh, Haryana, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Punjab and Rajasthan. Under the pilot project, the subsidy is transferred to those below the poverty line even before purchasing the fuel to avoid any hardship. Uttar Pradesh tops in kerosene use at 1.5 billion litres.

In Mumbai, oil companies get 15.42 a litre for subsidized kerosene, incurring a loss of 13.12 a litre, according to the oil ministry’s Petroleum Planning and Analysis Cell.

Credit rating agency Icra Ltd called the development a major reform considering the politically sensitive nature of the fuel. It said the move will help in reducing the revenue loss from selling kerosene below global market prices by 760 crore in 2016-17. The finance ministry has earmarked 26,947 crore of oil subsidy—for kerosene and LPG—for 2015-16.