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The outgoing UPA government has recommended a sharp increase in cooking gas and raising diesel prices to international levels in one shot to deregulate the fuel, making it politically easier for the Narendra Modi regime if it wants to undertake politically sensitive measures to cut subsidies, official sources said.

The UPA's oil minister Veerappa Moily, who will be back in Parliament as an opposition MP, had sent a proposal to Cabinet seeking a INR 250 increase in cooking gas cylinder, which costs about INR 414.

He had also proposed raising diesel prices, which are currently INR 4.40 per litre lower than the assumed international price. The proposals was sent recently to the Cabinet Secretariat after the oil minister's approval, but it was not taken up by the Manmohan Singh government.

The cabinet had deregulated petrol price in June 2010. It had also approved decontrol of diesel, but this decision was never implemented.

Last year, the cabinet allowed state oil firms to raise diesel rates by about 50 paise per litre a month until they rise to market levels."Pricing proposals will be urgently pursued with the new government because it involves huge subsidy bills," an official with direct knowledge of the matter said.

Officials said deregulating diesel currently requires prices to rise by INR 4.40 per litre but the gap would be lower if the rupee appreciates. The new government would have to take a call on this issue.

If prices are deregulated, it would fully open the fuel retailing market for companies such as Reliance Industries and Essar Oil, which had made a significant dent in the market nearly a decade ago when fuel prices were market determined.

It would also increase revenue of state firms such as Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd, which are forced to sell fuel below market rates. ONGC, which shares the burden of state refiners, would also gain.

State firms have estimated they will lose revenue of about INR 47,000 crore on cooking gas in the current financial year and about INR 51,000 crore in diesel unless the government raises their rates, officials said. It is expected that the new government won't raise kerosene rates, which is considered fuel of the poor. Companies are estimated to lose about INR 29,000 crore revenue by selling kerosene below INR 34 per litre, officials said.

Source-On Request