India mulls end to fuel subsidies

International The recommendation was a key policy issue raised in the ministry's annual economic survey.

India's finance ministry has called for an end to government controls on petrol and diesel prices to curb fuel demand by Asia's third-largest energy consumer. The recommendation was a key policy issue raised in the ministry's annual economic survey presented to India's parliament yesterday, ahead of a national budget update scheduled for Monday. "As long as domestic prices remained below the cost of imports, demand would continue to grow, accentuating the negative impact of the terms of trade effect on national income," ministry economists wrote in the survey. The call to ditch at least some fuel subsidies came a day after the Indian government raised prices for petrol by 10 per cent and diesel by 6.5 per cent, in response to higher crude prices that are causing state oil refineries to lose more than US$35 million (Dh128.5m) per day. "The government hopes that the people will understand the circumstances under which it has become painfully necessary to make these adjustments," said Murli Deora, the Indian oil minister. On Tuesday, China, the world's second-biggest energy consumer, raised prices for petrol, diesel and jet fuel by about 11 per cent to prevent losses at the Chinese state petroleum refiner, Sinopec. In New York yesterday, crude dipped towards $66 a barrel, after trading close to $72 earlier in the week. But oil prices are still roughly 60 per cent higher than at the start of the year. The Chinese and Indian price rises were likely to have a material effect on oil demand in those countries, which could help restrain international crude prices, said Robin Mills, the petroleum economics manager for Emirates National Oil Company in Dubai. Rising oil consumption in developing Asian and Middle Eastern economies, offsetting a prolonged slump in industrialised countries' appetites for fuel, were expected to lead a recovery in global oil demand later this year. But fuel subsidies are a heavy burden on the governments of rising Asian economies, according to Mr Mills, "and as their economies grow, the burden just gets bigger". As crude soared in the first seven months of last year, the Indian government raised fuel prices in February and June, sparking protests and worries about higher inflation. Last December, China introduced a new fuel pricing mechanism that allows the government to adjust prices when crude oil costs change by more than 4 per cent over 22 working days. [e-mail]