Govt to raise diesel prices once finance bill approved: source

Workers fill diesel in plastic containers at a fuel station in Noida in Uttar Pradesh January 27, 2011.

NEW DELHI (Reuters) - India will raise retail prices of subsidised fuels, including diesel, once parliament approves the finance bill for the current fiscal year early next month, a senior government source with knowledge of the matter said on Thursday.

Parliament is expected to consider the finance bill on May 7 and approve it a couple of days after that.

"The government's credibility on fiscal consolidation is at stake. After crude prices remaining over $120 a barrel, hike in oil (fuel) prices is certain," the source, who did not wish to be named because of the sensitivity of the issue, told Reuters.

"We cannot do without it. Once the finance bill is approved, oil prices including diesel would be raised," he said.

Finance Minister Pranab Mukherjee has vowed to raise fuel prices as soon as possible to tackle a rising subsidy burden and large deficits, but the move is politically fraught for the weak coalition government, already under fire over high inflation.

Diesel prices were last raised in July and the government has still not fulfilled a promise to fully liberalize the market. It was expected to raise prices earlier this year.

India imports about 80 percent of its crude oil needs. Rising global prices increases its import bill and widens the trade and current account deficits.

In theory, India allows state fuel retailers to fix petrol prices to market rates but continues to cap prices of other fuels at a lower rate to rein in inflation and protect the poor.

However, the state fuel retailers - Indian Oil Corp (IOC.NS), Bharat Petroleum Corp (BPCL.NS) and Hindustan Petroleum Corp (HPCL.NS) - have not raised prices of petrol since December in line with global trends due to an unofficial dictat from the government.

Any price rise will help curb rampant diesel use, which has increased as the market-driven price of alternatives like fuel oil have jumped. Diesel now accounts for a third of local fuel use.

The source indicated gasoline prices could be raised around the same time as diesel.

Softening inflation, currently at about 7 percent, also strengthens a case for a hike in fuel prices.

The government will not reverse a hike in gold import duty to 4 percent from earlier 2 percent, introduced in March, the source said, adding it may abolish an excise duty levied on non-branded jewellery.

Jewellery traders across the country went on strike last month protesting against the duties. The industry called off the strike after it said the finance minister promised to reconsider.

(Editing by Frank Jack Daniel)