The government has yet again deferred a decision on raising prices of diesel, kerosene and cooking gas, needed to rein in the fiscal gap, government sources said on Wednesday, as it deals with one of the worst political crises in recent years.
It was the third time in two months that Prime Minister Manmohan Singh's government has sidestepped a decision on lifting the state-set prices, fearful of stoking inflation at a time when public anger is running high over high profile graft scandals.
Veteran social activist Anna Hazare and yoga guru Swami Ramdev have launched fasts to force the Congress-led coalition government to take tough measures against corruption, and the government is under fire for breaking up Ramdev's protest by force.
"The meeting has been put off because of the political crisis," a source at the oil ministry said.
Raising fuel prices will help the government meet its fiscal deficit target of 4.6% of GDP for 2011/12, given rising crude oil prices and sagging economic expansion that officials say will depress growth in tax revenue.
But it will also stoke inflation, which at 8.66% in April, is above the RBI's comfort zone of around 5%.
New Delhi has budgeted a fuel subsidy bill of USD 5.2 billion for 2011/12, assuming oil prices below USD 100 per barrel. Oil prices are currently above USD 115 a barrel.
Analysts say an increase of USD 10 a barrel in oil prices has the potential of increasing the fiscal deficit by around 0.2% of GDP.
OPEC oil producing countries on Wednesday failed to reach a decision on increasing output to rein in high prices, sending crude oil prices up by USD 1.
The oil ministry source said Oil Minister Jaipal Reddy was pushing for a hike, citing the need for profitability at state-run oil firms which could see a loss of Rs 1.8 lakh crore (USD 40 billion) this fiscal year on sales of subsidised fuel.
"For how long can you continue to buy time," the source said.
The government has allowed state-run oil firms to fix the price of petrol but continues to control the prices of diesel, kerosene and cooking gas to protect the poor and keep inflation in check.
Even as gasoline prices have been freed, state run oil firms have managed to raise prices twice this year.