Govt likely to buy time on diesel price hike

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The government, already under fire for raising petrol prices, may delay a planned diesel price hike for fear the move could cause further damage ahead of key state elections beginning early next year, analysts and other sources said.

Prime Minister Manmohan Singh's top coalition ally has threatened to quit government if a hike in petrol prices is not rolled back. His own Congress party is wary of angering rural voters, the main user of diesel, ahead of state elections.

"The timing may not be politically conducive to raising diesel prices because elections are just round the corner," said Kuldip Nayyar, a political commentator, echoing several other economists and a top official at a state-run oil company.

"Diesel is a political commodity, and the government has way too many problems now to invite more criticism for itself."

In a first indication the government could cave in to its ally's demand, a source in the Congress party said on Friday a partial rollback of the petrol price rise was possible.

In India, the government sets retail prices of diesel, cooking gas and kerosene to help control inflation and protect consumers, particularly the poor, from sharp fluctuations in global energy prices.

But it granted autonomy to state-run firms last year to fix retail prices for petrol and has said it is considering giving up control of other fuel prices as it struggles to meet a 2011-2012 fiscal deficit goal.

FISCAL PRUDENCE

Demand for diesel has soared in recent years thanks in part to the subsidies that make the fuel more attractive than petrol for India's millions of new car owners, as well as for farmers and heavy transport operators.

"It is always difficult to raise diesel prices as it is widely used by farm sector and industry for transportation. It is not perceived as a luxury fuel," said Victor Shum at Purvin & Gertz.

The need to make a decision on diesel comes at a bad time for Prime Minister Singh. His government is struggling to clear its name in multi-billion dollar corruption scandals, while inflation remains high and the economy is slowing.

But raising fuel prices now could be the government's last chance to meet this year's fiscal deficit target of 4.6 percent of GDP.

"The government may not meet the fiscal deficit target as there are no revenue streams, no money from the dis-investment programme," said an oil ministry official.

"But at the same time you look at inflation -- food inflation is already double-digit, so it is difficult for the government to raise diesel prices at this juncture," the official said.

High global oil prices and a depreciating rupee have worsened the finances of state fuel retailers, with their revenue losses on subsidised fuel sales expected to cross $26 billion this fiscal year ending March 2012.