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.