India to ease state controls on diesel prices

India will ease state controls on diesel prices, Prime Minister Manmohan Singh said on Tuesday, days after the government allowed market prices for gasoline.

Dr Singh has reinforced his reformist agenda by announcing that diesel prices will be freed up to market forces.

The Congress party-led coalition was criticised for moving too slowly over reforms in its second term.

But now into its second year after re-election the government appears to be moving faster, spurred on by a need to cut a fiscal deficit and free funds for social spending before state elections im 2011.

The move comes amid a window of opportunity for the Congress-led coalition as an out-year for elections is a one-time window to ignore populist pressures.

The prime minister has gone further than expected.

Friday's announcement that gasoline prices would be freed raised a storm of protest from opposition parties and allies within the coalition, including some members of Congress.

Part of this push may be linked to Dr Singh's attendance at the G20 summit, where he needs to show the world India is serious as it presses for global financial reform.

His call for "sound financial management" resonates with what other major economices are calling for amid the global slowdown.

Dr Singh may also be looking increasingly at his legacy as the clock ticks into his second five-year term.

The 77-year-old leader may in the new few years have to give way to younger political leaders and some politicians say he is increasingly concerned that he has a reformist legacy that remains.

The move will annoy the Opposition parties.

So far into the second term they have been able to disrupt parliament and stifle reform such as a Bill to define liability for private investors building new nuclear plants.

The next parliamentary session may now see further hurdles to key bills such as opening up the insurance sector.

But the government has cards in the game.

Some of the funds saved by reducing subsidies will go to social programs.

A food security Bill being prepared may also become a vote winner for the Congress.

The government also won a confidence vote in the last parliamentary session over tax hikes and the opposition and its allies often squabble among themselves, giving them less clout to battle Congress.

But there may be a danger of inflation, already in double digits.

If diesel pricing is completely freed, that will further stoke inflationary pressures.

Freight costs are expected to shoot up.

Trucks carry a big chunk of fruits and vegetables to the markets everyday and rising freight costs will lead to higher food prices.

Manufacturing inflation, already above 6 per cent, may also see a spurt.

In that scenario, analysts see a rise in inflation by between 100 to 150 basis points which may be enough to keep headline inflation above 10 per cent for some time.

Private firms such as Reliance Industries and Essar Oil, which are expanding their network of fuel stations, would gain enormously if diesel prices are freed.

Petrol, which has already been freed, accounts for only 10 per cent of India's refined fuels consumption but diesel's share is about a third.

State firms would lose revenue.

India has about 40,000 outlets that pump refined fuels, the vast majority owned by state firms.

Free pricing of diesel would encourage private firms to accelerate the expansion of private retail networks and cut a key source of revenue for firms such as Indian Oil Corp, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd.