Fearing a further downgrade of India's credit rating if a burgeoning fiscal deficit is not contained, the government, under pressure to cut fuel subsidies, is likely to increase diesel prices by Rs. 5 per litre shortly after the Parliament sessions ends, said government sources.
"We (government) are left with very limited options and a hike in the price of diesel has become inevitable," a top official in the Prime Minister's Office (PMO) said.
"Fuel subsidies have to be capped and the finance ministry is seriously working on this aspect."
However, officials agreed that increasing diesel prices is not going to be an easy task.
Since any increase in diesel prices has a cascading effect on the prices of all essential commodities, thereby fuelling inflation, the government will have to cautiously tread the path, especially the country is already facing a drought-like situation in the wake of patchy monsoon rains. Any hike in prices will affect farmers, who are using diesel to pump water for their farms.
Diesel has a weightage of 4.67 in the WholeSale Price Index (WPI), which is highest among the 670 commodities of the WPI Index. For each rupee increase in diesel price, the WPI index is estimated to increase by 0.13%.
It is estimated that a Rs. 5 per litre increase would add 0.5-0.8 percentage points to headline WPI, which is currently a little below 7%.
Diesel prices have not been increased since June 25, 2011 and the government had to pay Rs. 41,000 crore (or 0.7% of the GDP) to oil marketing companies for subsidising diesel.
State-owned oil marketing companies - Indian Oil, Hindustan Petroleum and Bharat Petroleum - are currently said to be incurring losses of over Rs. 14 a litre on diesel, Rs. 237 on every LPG cylinder and Rs. 30 a litre on kerosene.
The projected losses on the sale of these fuels below cost have also been projected at Rs. 1.9 lakh crore for the current fiscal.
However, the finance ministry, yet to release subsidy support to oil firms, is screening the projected losses of oil companies and is likely to prune them by almost 20%, said sources.