The government could decide to hike domestic fuel prices once headline inflation begins to soften because doing it now would risk pushing consumer prices higher, Prime Minister's Economic Advisory Council Chairman C. Rangarajan said on Saturday.
Submitting fuel to full market pricing would bolster India's fiscal health because fuel accounts for a quarter of its estimated subsidy bill of 1.2 trillion rupees ($25.6 billion).
It would also help state-run energy retailers such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd operate profitably.
"Perhaps the timing of the decision could coincide with the period when the overall inflation is showing some softening," Rangarajan told Reuters in an interview.
A panel led by Finance Minister Pranab Mukherjee on Monday postponed a decision on reforming fuel pricing after two key ministers from small coalition partners failed to attend, a clear signal of their reluctance to be associated with a policy that may improve India's finances at the cost of votes.
The government is seen biding its time until it gets a better sense of the strength of the oncoming summer monsoon, which could ease the impact of inflation on consumers already burdened by higher food bills.
Rangarajan, a former head of the Reserve Bank of India (RBI), said he expects the May headline inflation number to stay below the 10 percent level and eventually ease to around 6 percent by end-March 2011.
The wholesale price index , the central bank's most closely watched gauge of inflation, probably rose an annual 9.56 percent in May, staying close to 9.59 percent in April, according to a Reuters poll.
Inflation has become a major worry for the Congress-led government and is seen undermining its support base. The RBI has described the prevailing inflationary situation as "worrisome" and has raised rates twice since mid-March.
The bank, which is looking to raise rates steadily, is expected to deliver another hike of 25 basis points at its scheduled policy review on July 27 amid calls from some analysts for more firm policy action.
However, Rangarajan said only high and persistent inflation could provoke a change in the central bank's policy approach.
"If there is some trend towards a decline in the inflation rate, even though the level remains high, then the Reserve Bank could take a slightly relaxed view and decide to take action only at the time of review," he said.
India's industrial output rose much faster than expected at 17.6 percent in April from a year earlier, data showed on Friday. The data comes on the heels of an annual 8.6 percent expansion in the economy in the quarter through March.
The government expects the economy to grow 8.5 percent in the current fiscal year that started on April 1, after growing 7.4 percent last year.
Some fear the euro zone crisis could put that projection at risk.
"The manner in which it will be dealt with by the euro zone has implications for the Indian economy," he said. "I believe the EU will take action, will provide the necessary support to the various countries."