UPDATE 2-India's oil min wants market diesel price for industry

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By Nidhi Verma

NEW DELHI, Sept 8 (Reuters) - India's oil ministry will soon seek cabinet approval to charge higher diesel prices for industrial users and power plants to curb surging demand and rising subsidies, a top government official said on Monday.

The ministry is also seeking an additional 25 percent tax on large cars running on diesel, the official, who did not want to be named, told Reuters on Monday.

"It is difficult to charge higher prices from big car owners so we are thinking of imposing 25 percent cess on the car price," he said, adding the ministry envisages diesel being sold at market rates to all industrial customers other than the railways and state transport corporations.

"We are in process of consultation with other ministries and we will soon send a proposal to the cabinet," he said.

Private vehicle owners have largely been shielded from surging crude prices as state-set fuel rates have been increased moderately.

Diesel consumption in India has been rising sharply because the subsidised fuel is cheaper than fuel oil, luring industrial users.

India's relatively low fuel prices have contributed to the country's growing oil demand and are a factor in supporting crude prices at elevated levels, analysts say .

"The market price will be about 55-57 rupees ($1.25) a litre," the official said. At present, a litre of diesel in Delhi costs 34.80 rupees.

He said the implementation of a dual pricing policy would help generate 140-150 billion rupees ($3.13-$3.36 billion) per year for the three state-run retailers -- Indian Oil Corp Ltd (IOC.BO), Hindustan Petroleum Corp (HPCL.BO) and Bharat Petroleum Corp (BPCL.BO).

State oil retailers are daily losing millions of dollars on selling auto and kitchen fuels at subsidised rates.

India's domestic diesel sales rose 10.3 percent in July from a year ago <O/INDIA2>, but that was a slowdown for Asia's third-largest oil consumer as state firms struggled to meet an 18 percent surge in demand in the previous three months.

Indian state-refiners aim to import up to 3.5 million tonnes of diesel in the current financial year ending March 2009, and are seeking changes in tax rules to help them buy diesel from Reliance Industries (RELI.BO) as this would cut freight costs. (Editing by Mark Williams)