Decision on Diesel Deregulation After State Polls

India will decide on whether to end government control of diesel pricing after elections in two states next month, an oil ministry source said. India currently controls prices with subsidies under a scheme originally intended to help the poor and rein in inflation, but local prices are now higher than global rates, making a case for a cut in retail prices. "The diesel under-recovery (goal) has been wiped out and there is over-recovery of 0.35 rupees per litre (less than a cent) with effect from Sep. 16," a government statement said on Tuesday.

A rising subsidy bill and strained public finances in a sluggish economy forced the Cabinet in January 2013 to allow state retailers to marginally raise diesel prices each month. "We tinker with diesel prices once a month. There is a case for a cut in diesel prices towards the end of the month but a decision is yet to be taken on that," the source with direct knowledge of the matter said. "Decision on diesel deregulation will be taken after state elections."

Reserve Bank of India Governor Raghuram Rajan on Monday said India should use this opportunity of easing global oil prices to eliminate diesel subsidies at the earliest.

Maharashtra and Haryana, with chief ministers from the opposition Congress Party, will go to the polls on Oct. 15, offering Prime Minister Narendra Modi the chance to chalk up gains after his general election triumph in May. Under India's election rules the government can not make any major policy decisions during an election campaign which may directly impact voters.

The oil ministry will have to seek a cabinet nod for deregulating diesel prices, two ministry sources said last month.

Government controls over pricing of liquefied petroleum gas, kerosene and diesel led to revenue losses at state fuel marketing companies - Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp..

"For oil marketing companies, it is quite positive because 55 percent of their sales are diesel and positive margins on diesel definitely helps their earnings," said Rohit Ahuja, Mumbai-based analyst at ICICI Securities.

State-run Oil and Natural Gas Corp., Oil India Ltd. and GAIL (India) sell crude and related products at a hefty discount to partly compensate for losses of retailers, who also get some cash subsidies from the government. Ahuja said benefits for ONGC and Oil India would come with a lag as the government might look at easing their burden through a "subsidy sharing formula or a fixed number". Currently these companies' subsidy share varies from quarter to quarter.

Deregulation could bring the return of private firms such as Reliance Industries and Essar Oil to retail sales. Such companies do not receive government support for selling diesel at discounted rates and currently sell via state refiners despite having their own sales infrastructure.

(Additional Reporting by Aman Shan in MUMBAI; Editing by Michael Perry)