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Govt May Take Plunge, Hike Diesel Prices

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The government was expected to raise diesel prices on Friday, although a delay in a government meeting to decide on the politically unpopular decision raised questions as to whether or not officials were in full agreement.

Oil prices fell 6 per cent on Thursday after major consuming countries announced an emergency release of stocks, pushing benchmark Brent crude to a four-month low and providing a window for India to raise prices with less pain for consumers.

Since it was first elected in 2004, the government of Prime Minister Manmohan Singh has more often than not refrained from pushing through tough reforms in favour of pleasing its predominantly rural voter base.

It has delayed a decision on increasing diesel and other fuel prices for months, even as its subsidy burden mounts.

Persistently high inflation, currently the highest among major Asian economies, as well as its handling of a spate of corruption scandals has added to the government's reluctance and led to what many critics say is a state of policy paralysis in New Delhi.

"We are working on more options, the final decision will be announced after the meeting," Oil Minister Jaipal Reddy told reporters, adding that the meeting had been rescheduled for 7 p.m., a delay of 6 hours.

Sources familiar with the matter had said a price rise was likely. The government could also cut taxes and Reddy said more options were being considered.

Reddy told Reuters earlier on Friday the International Energy Agency's (IEA's) planned release of strategic stockpiles would give only temporary respite.

"I cannot speculate on the future trend but in the short run there is no hope. Even if there is a slight increase in production those gains will not be made available to us because of unbridled speculation in the financial markets," he said.

"We don't know whether this (softening in global prices) is a stable trend," he added.

J.P. Morgan cut its forecast for benchmark Brent oil for the third quarter to $100 a barrel from $130 after the IEA move but on Friday global crude prices were already rebounding.

Half of India's population are farmers, but the government needs to cut its massive subsidy bill on cooking gas and diesel in order meet its budget targets.

A year ago, the government freed up petrol prices, which have risen about 23 percent since then, and said it could do the same with diesel. International oil prices are about 39 percent higher over the same period.

Price Rise Could Add To Inflation
With inflation above 9 percent and the domestic fuel price index up nearly 13 percent on the year, a fractious coalition government is wary of alienating its core voter base among India's 500 million poor, who live on less than the cost of 2 litres of diesel a day.

State-run fuel retailers Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp are losing Rs 4.56 billion ($101.4 million) a day on sales of diesel, kerosene and cooking gas at state-set cheaper prices.

"Obviously diesel and LPG (liquefied petroleum gas), which is being considered, will add to inflation, diesel particularly a bit more as compared to petrol and LPG because of transport costs," said Saugata Bhattacharya, an economist at Axis Bank in Mumbai.

A three rupee increase in the price of diesel from current levels of 38 rupees ($0.845) per litre would add 40-45 basis points to wholesale price inflation, according to Yes Bank, which expects annual headline inflation to top 10 percent in August, based in part on expected fuel price hikes.

Shares in Bharat Petroleum and Hindustan Petroleum were up 2.84 per cent and 4.35 per cent, respectively on Friday, outperforming the broader market.