Agencies/New Delhi

Fuel subsidies are a major drain on India’s budget, which is already running a deficit that the government is struggling to bring within a target of 5.3% of GDP for the financial year ending March.

India imports 80% of the crude oil it refines into diesel, and benchmark Brent crude prices were at their highest annual average on record last year at around $111 a barrel, significantly raising its energy bill.

Diesel accounts for about 40% of India’s fuel consumption, and the government currently loses Rs9.6 for every litre of diesel sold. Diesel sells for Rs47.15 a litre.

State-run refiners - Indian Oil, Bharat Petroleum and Hindustan Petroleum - sell diesel, kerosene and liquefied petroleum gas at subsidised prices, with the government subsidising some of their hefty losses.

“Oil marketing companies have been allowed to raise diesel prices in small quantities over a period of time,” senior oil ministry official G C Chaturvedi told reporters.

Finance Minister P Chidambaram said he did not know when, or by how much, diesel prices will be increased.

“The companies are authorised to make price revisions from time to time” following “an earlier proposal to deregulate diesel prices,” Oil Minister Veerappa Moily said following a cabinet meeting.

Oil companies would be allowed to increase prices of diesel by a “small quantum,” Moily said, with a price rise expected to come within a week.

Moily too did not say by how much companies would be allowed to hike prices but earlier in the month the oil ministry had proposed a Rs3-4.50 per litre hike in one go or in monthly instalments of one rupee to Rs1.50 per litre.

The government liberalised petrol prices in June 2010, but has often prevented costs from being raised to reflect rising oil prices on global markets.

Prime Minister Manmohan Singh’s government, which must hold general elections by early next year, is trying to revive Asia’s third largest economy, which is set to grow at 5.7-5.9% this fiscal year, its weakest rate since 2002/03.

Ratings agencies had threatened to strip India of its investment-grade credit rating if the government did not take steps to rein-in the widening fiscal deficit. Chidambaram has repeatedly vowed that the deficit will not exceed 5.3% of GDP this financial year.

Fuel subsidies comprised more than 5% of the government’s budget spending in previous 2011/12 budget.

Asked if raising diesel prices would affect this year’s subsidy bill, Chidambaram said the effect was so far unclear.

“I am proceeding on the basis that the subsidy bill remains the same. When they will make the small corrections, how much, I cannot say,” he told reporters.

Fuel consumption in India rose 5% in the last fiscal year, its fastest since 2007/08, and analysts said any price increase was unlikely to dampen demand.

“The prevailing thought is there is certainly a sense of inevitability considering the huge subsidy burden and the need to maintain the fiscal deficit to GDP ratio at 5.3%,” said Shubhada Rao, chief economist at Mumbai’s Yes Bank.

“In that context, there is inevitability of upward price adjustment in petroleum prices. The magnitude and the timing will be worked out between the government and the retailers.”

In a sweetener for allowing refiners to hike diesel prices, the cabinet increased the number of subsidised liquefied petroleum gas cylinders - widely used for cooking - to nine from six.