India set to raise fuel price, inflation a worry

India is set to raise petrol and diesel prices to keep pace with crude oil's record run but the move will fuel inflation, heaping more pressure on a government struggling to calm prices ahead of elections.
Crude oil's surge has hurt consumers around the world and countries such as Indonesia are being forced to raise state-controlled prices. China said on Thursday it would retain controls on fuel prices, denying rumours about deregulation.
"A fuel price hike is inevitable," Indian Petroleum Secretary M.S. Srinivasan told reporters on Friday, adding that the oil ministry was also seeking tax changes to help Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, which are forced to sell fuel below cost.
India sets the heavily discounted prices at which fuel is sold in order to help fight inflation and protect hundreds of millions of poor people from price shocks.
It partially compensates oil retailers by issuing oil bonds to them, which they can either hold as assets or sell in the market, while upstream companies share some of the burden.
The government, which faces a string of state elections this year and a national poll by May 2009, is worried that higher fuel prices will stoke inflation, already at its highest level in 3-½ years at nearly 8 percent.
It has strived to contain inflation with tough restrictions on exports of rice and duty cuts on some imports, while steel firms have been firmly told to freeze prices for three months.
But with oil above $130 a barrel and losses at state energy firms mounting, the government has little option but to raise retail fuel prices.

The oil minister said on Friday the government may take a week to decide whether to raise prices.
"With a fuel price hike in the offing, inflation is headed up and we may see inflation hit 8.5 percent by June," said A. Prasanna, economist at ICICI Securities.
"We expect the central bank to take further liquidity tightening measures to control inflation."
The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is published weekly.