Govt may raise fuel prices as crude rally pinches

By Nidhi Verma

NEW DELHI (Reuters) - The government may have to raise state-set fuel prices as oil's rally to record highs over $135 a barrel threatens to cripple state firms forced to sell fuel at below-market prices, a government source said on Thursday.

The government is loathe to raise retail fuel prices as it battles soaring inflation and faces a difficult election next year, but losses at state refiners such as Indian Oil Corp may leave it with no alternative.

Petroleum Minister Murli Deora is scheduled to meet Prime Minister Manmohan Singh and the heads of state-run firms on Friday, the official, who did not want to be identified, said.

"There is a possibility that the cabinet may discuss various measures, including fuel price hike, tomorrow," he said.

The average price of crude oil imported by India has doubled since June 2006, but state-set retail prices are lower. The government cut prices in Nov 2006 and Feb 2007, and then raised them in February this year.

State-run refiners are required to sell fuel at state-set prices to keep it affordable to the poor and also help keep inflation under control. The government partly compensates them by issuing special bonds, which the oil firms can sell.

IOC, the largest state-run refiner, was suffering a revenue loss of 3 billion rupees ($70 million) a day, its director for finance, S.V. Narasimhan told Reuters on Thursday.

The aggregated daily revenue loss for IOC and its state-run peers Hindustan Petroleum Corp and Bharat Petroleum Corp was 5.5 billion rupees a day, he said.