India's Oil Dilemma

LONDON -

As oil continues to hover around the $130 mark, twice its level from a year ago, Asian governments have reluctantly been giving up their efforts to protect consumers via price controls on refined products such as gasoline. But while Indonesia this week ignored widespread protests and allowed fuel price prices to rise by 28.7% and Taiwan permitted a 15.0% increase, the big India economy is unlikely to follow the same route.

Murli Deora, India's oil minister, said in New Delhi on Friday that a decision about what to do about the soaring price of oil would be made in the next few days.

But the government is likely to be reluctant to pass on the cost of higher oil prices to the Indian consumer, ahead of next year's general elections. Over the weekend, the Congress Party lost control of the state of Karnataka to the main opposition, the Bharatiya Janata Party, in regional elections.

Adding to its reluctance is inflation, which has continued to soar despite cuts to import duties and tighter controls on liquidity. Data published on Friday showed inflation for the week rose to a staggering 8.1%. (See: "The Fly In India's Growth Story" )

The impact of the government policy has been devastating for India's three major state-run oil companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum.

The government allowed fuel prices to rise by 4.0% in February, and it increased subsidies to oil companies, but that has not stopped them from losing millions of dollars a day. (See: "India Raises Ceiling On Gasoline Prices, A Little" )

The country's largest oil company, Indian Oil reported on Wednesday a fourth-quarter net loss of 4.1 billion rupees ($96.6 million), against a profit of 15.0 billion rupees ($353.4 million) a year earlier, despite receiving 189.97 billion rupees ($4.5 million) in government subsidies.

If the government does allow fuel prices to rise, it will be by a minimal amount, of around 4 rupees (9 cents) a liter, said a Mumbai-based analyst who asked not to be identified.

The government has said that it is considering a number of other options including extending the credit lines to the cash-strapped companies.

Indian Oil closed up 1.1%, at 425.35 rupees ($10.02) on Friday in Mumbai, while Bharat Petroleum fell 0.3%, to 357.70 rupees ($8.43).