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Cabinet keeps off fuel price reform

NEW DELHI (Reuters) - The cabinet did not discuss any proposal to raise fuel prices or reform the sector on Thursday, a government minister said, continuing the uncertainty over a move that faces strong political resistance.

A man walks past gas cylinders loaded on a cart in Mumbai June 7, 2010. The cabinet did not discuss any proposal to raise fuel prices or reform the sector on Thursday, a government minister said, continuing the uncertainty over a move that faces strong political resistance. REUTERS/Danish Siddiqui

Inaction on reforms cheered opposition parties and allies of the ruling coalition but economists said the growth rate may fall below 8 percent if the government does not take bold decisions to cut subsidies.

The oil sector absorbs a quarter of the annual subsidy bill of 1.2 trillion rupees ($25.5 billion), or 1.7 percent of gross domestic product, but some coalition allies fear that reforms would stoke already-high inflation and anger voters.

A panel led by Finance Minister Pranab Mukherjee postponed a decision on reforming fuel pricing on Monday, after two key ministers from small coalition partners failed to attend in a clear signal of their reluctance to be associated with a policy that may improve India’s finances but will cost votes.

Mukherjee was due to decide the date of the next meeting of the panel with his cabinet colleagues on Thursday, but it got put off again.

“It didn’t come up for discussion,” Ambika Soni, information and broadcasting minister, told reporters after the cabinet meeting.

The oil ministry wants free pricing of petrol and diesel to help state firms who are forced to sell fuel at low, state-set prices.

Reforms will cut subsidies, while private companies Reliance Industries and Essar Oil would be able to compete with state firms who dominate the retail fuel market because subsidies help them sell cheaper fuel.

International oil traders are also keenly watching India’s moves as Reliance and Essar, unable to compete effectively in the domestic market, are geared towards exports, while state refiners need to import oil products when they face a shortage.

OIL TRADERS

The International Energy Agency said the outlook for reforms seemed positive as three official panels in recent years have concluded that fuel prices should follow market forces, not government dictats.

“Momentum for reform indeed appears to be gathering,” it said in a report.

But regional allies remained adamant.

“We hope the government will consider our party stand against any hike in fuel prices, which has been made clear,” said Saugata Roy, a Trinamool Congress leader and minister in the coalition government of Prime Minister Manmohan Singh.

Mani Shankar Aiyar, who was oil minister during Singh’s first tenure as prime minister, said contentious issues like fuel pricing cannot be resolved quickly.

“We are a democratic country and those who favour a price hike must build a public opinion and that is why it will take time,” he said.

The main opposition Bharatiya Janata Party, whose government in 2002 had freed petrol and diesel prices eight years ago, said it opposed higher fuel prices.

“The BJP is nonetheless happy that it was not even discussed and we are not going to accept any fuel price hike,” party spokesman Rajiv Pratap Rudy said.

N. Bhanumurthy, an economist with think tank National Institute for Public Finance and Policy, said subsidy burden can knock India’s growth rate below 8 percent this year, lower than the projected 8.5 percent.

Additional reporting by Abhijit Neogy; Writing by Himangshu Watts; Editing by Ranjit Gangadharan and Sanjeev Miglani

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