NEW DELHI (Reuters) - India's government on Saturday lifted diesel price controls and raised the cost of natural gas, giving market forces greater sway as it seeks to attract energy investment, boost competition and cut subsidy costs.
The decisions marked an acceleration in reform measures by Prime Minister Narendra Modi, who won a landslide general election victory in May and was buoyed by a strong showing in two state elections this week.
Lower prices of diesel and a smaller-than-expected rise in local gas rates will help Modi fulfill an election pledge to curb inflation and pull India's economy out of its longest slowdown since the 1980s.
"Henceforth, like petrol, pricing of diesel will be market determined," Finance Minister Arun Jaitley told a news conference after Modi chaired a cabinet meeting.
A litre of diesel will cost about 5.7 percent, or 3.37 rupees ($0.05), less for consumers from Sunday, while prices of locally produced gas will go up by a third from next month.
The first cut in diesel prices across the country in more than five years, triggered by falling global oil prices, will help further ease inflation that is already tracking lower.
Diesel makes up nearly half of India's fuel demand and its usage is set to rise as Modi wants to boost the employment-generating manufacturing sector to generate growth and jobs.
A fall in global oil prices, down more than 20 percent from this year's June high, means that ending costly diesel subsidies will save the government money without hurting consumers.
India imports more than 70 percent of its oil needs and every $10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point, experts estimate.
Diesel deregulation will significantly reduce subsidy payouts by Oil and Natural Gas Corp, GAIL (India) Ltd and Oil India Ltd.
These companies sell crude and refined products to state refiners at discounted rates to partly compensate them for losses on fuels sales at regulated prices.
The move to market-based pricing will boost the role of private players like Reliance Industries and Essar Oil in India's retail arena.
Such companies do not receive federal support for selling diesel at discounted rates and currently sell via state refiners despite having their own sales infrastructure.
"It is a good move. This will create competition in the market and will benefit consumers, government ... and help upstream companies invest more funds for exploration," said L.K. Gupta, managing director of Essar Oil.
The government has reworked the gas pricing formula approved by the previous Congress-led government and restricted the rise in local gas prices to $5.61 per mmBtu from Nov. 1. The prices will be revised after every six months.
The previous government had suggested for raising domestic gas prices to $8.4 per mmBtu from the current $4.20 per mmBtu.
"This price will take into consideration the fact that there is sufficient incentive for drilling and investment and also it is not excessively burdensome as far as consumers are concerned," Jaitley said.
About 80 percent of the additional revenue due to revision in gas prices will go to state run companies ONGC and Oil India.
Reliance and its partners BP and Canada's Niko Resources will not get the benefits of the price rise for gas produced from its D1 and D3 gas fields in the east coast deepwater D6 block, where output has fallen drastically and is way below the promised volumes.
Reliance is currently locked in arbitrations with the government over its D6 block.
Reliance and its partners will deposit the differential between $5.61 and $4.20 in a separate fund until the arbitration is resolved, said Oil Minister Dhramendra Pradhan.
Additional reporting by Mayank Bhardwaj; Editing by Douglas Busvine and Rosalind Russell