The government is planning to limit diesel subsidy at a pre-fixed level and allow retailers IOC, HPCL and BPCL to raise diesel price if the subsidy given by the state and upstream firms like ONGC is not sufficient.

Now, the subsidy given by the government on fuel including diesel fluctuates depending on how crude oil price moves in global markets. Upstream firms ONGC, Oil India and Gail India contribute a third of the total subsidy requirement. The new pricing regime that involves partial decontrol of diesel price will be implemented by June this year, when assembly elections are over in five states, said a highly placed government official. Of course, a part of the losses will have to be borne by fuel retailers themselves before they pass on the unmet cost to the consumer.

The government will fix the subsidy on diesel in advance considering the prevailing high global crude price. A total decontrol of the commodity is unlikely as it would impose a heavy burden on the consumer suddenly. Petrol price is also likely to be increased by the end of the first quarter of next fiscal.

IOC, HPCL and BPCL are now incurring a loss of more than R4.5 a litre on petrol, R11 a litre on diesel, R23 on kerosene and R297 on a cylinder of LPG. ?After May, the government is planning to start diesel price decontrol in a calibrated manner?, said the official.

Assam, Kerala, Puducherry, Tamil Nadu and West Bengal are going for Polls next month.

Chief economic advisor in the finance ministry Kaushik Basu said the government will have to de-regulate diesel price if the unrest in West Asia puts further upward pressure on global crude prices. ?In order to keep fiscal consolidation plans on track, we need to make tough choices like de-regulating diesel prices. This will depend on how the global situation impacts crude prices and shoots up under-recoveries of oil marketing companies,?Basu said at the Express group?s Idea Exchange programme recently.

The global crude oil price has been ruling at an uncomfortable level of $110 a barrel for sometime. If crude continues to be expensive, it would render the finance ministry?s calculations way off the mark. It touched a 30-month high of $120 a barrel in February, after the unrest in Tunisia and Egypt. The basket of crude oil that India buys has averaged $110 per barrel this month as against $72-73 a barrel recorded last June when diesel price was raised.

Officials said that even if diesel price is freed up partially, the total subsidy bill for fuel could rise above the budget estimate of R23,000 crore for next fiscal. Since there would be no fund mobilisation opportunity next fiscal like third generation spectrum auction that was held this fiscal, the government would be tight-fisted while allowing fuel subsidy considering the need to bring down fiscal deficit to 4.6% of GDP by march 2012.