NEW DELHI (Reuters) - A government panel recommended that India immediately raise diesel prices by about 9.5 percent or 5 rupees a litre and take other measures to cut a huge oil subsidy bill, but its suggestions may prove tough to follow.
The panel, set up in May to advise the government on fuel pricing, also suggested capping the subsidy on diesel sales at 6 rupees a litre, Oil Minister S. Veerappa Moily told a press conference on Wednesday
India, the world's fourth-largest oil importer, needs to rein in spending to help stabilise its finances and support the rupee, which hit a record low earlier this year.
The 5 rupee diesel price hike could cut the annual subsidy bill by 400 billion rupees, said Kirit Parikh, the head of the government panel that submitted the report.
Diesel accounts for over 40 percent of India's refined fuel use.
With state elections looming from November and a general election due by May 2014, however, the government may find it difficult to raise domestic fuel prices sharply at a time that inflation is still high.
"We recognise it may not be possible right now to increase prices by the same quantum as suggested in the report," Parikh said.
Annual inflation accelerated to a seven-month high of 6.4 percent in September, driven by higher food prices and fuel inflation, which is running at about 10 percent.
Diesel demand in India is not very sensitive to price, because it is mainly used to transport goods by road and to run generators in a country plagued by power shortages. Demand runs at over 1 million barrels per day.
Fuel retailers Indian Oil Corp , Hindustan Petroleum Corp and Bharat Petroleum Corp sell diesel, kerosene and cooking gas at rates that are subsidised to protect the poor and tame inflation.
The government compensates the retailers in part with cash subsidies, and they also get discounted crude oil and refined products from oil explorers and gas utility GAIL .
In January, government allowed fuel retailers to raise the price of subsidised diesel by 1 cent a litre every month and asked bulk buyers to pay market rates, but prices are still below global market levels.
The panel also suggested a 4 rupee/litre increase in the price of kerosene, a politically sensitive commodity widely used by the rural poor.
For a link to the panel's report, click http://petroleum.nic.in/parikh.pdf
Kerosene prices have not been raised since June 2011, and any increase would help narrow the gap with diesel and curb switching and adulteration.
The panel also favoured limiting the sale of cooking gas cylinders sold at subsidised rates to six per household from nine, plus a gradual increase in retail prices to shift to market pricing in three years' time.
(Reporting by Nidhi Verma and Rajesh Kumar Singh; editing by Malini Menon)