Government weighs diesel price decision

The government will walk a tightrope on Thursday between raising diesel prices to reduce the burden of subsidies or holding them steady to keep a lid on inflation and avoid political and public outcry.

A panel of ministers, empowered to decide fuel prices, is expected to meet at 4:30pm on Thursday.

Asia's third-largest economy, trying to cut its deficit, has been looking for new ways to reduce subsidies paid to state-run oil retailers and reflect global crude oil market realities.

In June, it freed up petrol pricing and raised the prices of cooking gas, kerosene and diesel, triggering strikes that crippled transport. It also decided to end controls on diesel prices but says it was not possible to implement this right now.

Recently oil retailers raised petrol prices by 5.6%, the steepest hike in six months.

Any decision to raise diesel and cooking gas prices would be a political minefield in a country where half a billion poor live on little more than the cost of a litre of diesel a day.

Prime Minister Manmohan Singh's coalition government, already weakened by a series of corruption scandals, must seek to balance the benefits of more market-related pricing with the immediate impact on inflation, already spurred by rising food prices.

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.

Here are the possible decisions and their likely impact:

Prices held steady
This is seen as the most consumer-friendly step at a time when inflation remains high and the unsettled coalition government next year heads for major state elections in Tamil Nadu, Kerala and West Bengal.

Opposition to raising prices could come from within the ministerial panel, which includes two members from Congress' largest allies Trinamool Congress and Dravida Munnetra Kazhagam (DMK), who face crucial state elections next year.

* If prices are not changed, the government's fuel subsidy burden for the fiscal year ending March 2011 may rise even though Finance Secretary Ashok Chawla said the government would cap subsidies to only a third of revenue losses on fuel sales.

* For this fiscal year, India has offered a subsidy of $3.79 billion, about 0.3 percent of total expenditure, but over five times the budgeted amount and 15 percent more than a year ago.

* The move will not immediately impact the target of a fiscal deficit of 5.5 percent of gross domestic product this year, as the government has a large cash balance at the central bank.

* Keeping the current opaque subsidy regime may affect valuations of exploration firm ONGC and India's largest retailer IOC. Their share sales could be put back to the next fiscal.

* That could mean the government misses its target of raising $8.86 billion through the sale of its stakes in state-run firms.

* Share prices in IOC, Hindustan Petroleum, Bharat Petroleum, ONGC and Oil India could slip.

Raising prices
The message sent out by the oil ministry is loud and clear, that it wants an increase in diesel and cooking gas prices.

Oil secretary S Sundareshan recently said any increase of more than 2 rupees a litre -- around 5 percent -- must be approved by the panel meeting on Thursday.

He also said there was a need to raise prices as state-run firms suffer a revenue loss of 275 rupees on every 14.2 kg cooking gas cylinder sold and 6.50 rupees on a litre of diesel.

Impact
* Any rise would stoke inflation, possibly heading for 8 percent in December from 7.48 percent currently and persistently above the central bank''s target of 5.5 percent by March.

* According to estimates by the finance ministry, an increase in petrol and diesel prices could add about 1 percentage point to inflation.

* It will put added pressure on the Reserve Bank of India to raise rates on Jan. 25. The central bank has increased rates six times since March, pausing only at the Dec. 16 review.

* Lifting diesel prices could spark renewed opposition anger in the crucial February budget session after it disrupted the last session of parliament, stalling policy making.

* An increase in rates would encourage private firms Reliance Industries and Essar Oil to beef up local retail sales from their current negligible market share.

* Revenue could increase at IOC, HPCL, BPCL and upstream firms ONGC, Oil India and GAIL (India) that currently have to offer discounts on crude sales and products to marketing firms.

* Higher retail prices could briefly dampen demand for fuel.

* Share prices of all the oil firms could rise.