India, struggling to balance between cutting its costly fuel subsidies and curbing inflation, may tweak fuel taxes in the Feb. 28 budget to cushion the blow of rising global crude prices on state-run oil retailers.
Tackling the current informal structure of fuel subsidies would help investors put a better valuation on proposed share sales for Indian Oil Corp (IOC) and Oil and Natural Gas Corp, aimed at bringing in more revenues for New Delhi.
Any decision on cutting subsidies would be a highly charged politically in a country where half a billion people live on little more than the cost of a litre of diesel a day.
With inflation among the highest of major world economies and the government embroiled in a slew of corruption cases ahead of key state elections this year, raising diesel and other fuel prices appears highly unlikely.
Royalty issues are not addressed in the federal budget.
Here are some details on existing taxation and subsidies in India's petroleum sector and the possible changes in the budget.
One option that the government may consider is to slash duties on crude and refined petroleum products to ease the burden of state-run oil companies that are forced to sell diesel and cooking fuels at below market rates.
Last month, the then Oil Minister Murli Deroa said he hoped the finance ministry would roll back the custom and production taxes slapped on petrol, diesel and crude oil in last year's budget. That budget was passed when global crude oil prices were about half current levels.
Such a move would also insulate most people from the burden of rising crude prices, but lower tax revenues may hurt the government.
Although Asian countries are increasingly adopting market-oriented pricing policies for domestic fuel prices, some major regional economies such as Indonesia and Malaysia provide for subsidies in their budgets. Vietnam subsidises through a price management fund that compensates fuel distributors.
India sets the prices of diesel and cooking fuels, and partially compensates oil marketing firms for consequent losses.
Concerns over high inflation have forced the government to delay plans to cut most of these costly fuel subsidies, although petrol pricing was freed last year.
Diesel accounts for over one-third of fuel use and is crucial for transportation and the agriculture sector.
Subsidies are likely to be held steady in the budget as a consumer-friendly step at a time when inflation remains high and the unsettled coalition government this year heads for major state elections in Tamil Nadu, Kerala and West Bengal.
The government could emulate the reform path adopted for the fertiliser sector and give a fixed subsidy on a litre of diesel instead of announcing a consolidated amount in the budget. Beyond the fixed subsidy, the oil retailers may be allowed to pass on costs to consumers.
But opposition to raising prices has come from within the ruling coalition, which includes two members from Congress' largest allies Trinamool Congress and Dravida Munnetra Kazhagam (DMK), who face state elections this year.
For this fiscal year so far, India has offered a subsidy of $5.55 billion, more than seven times the budgeted amount and about 68 percent more than a year ago.
Indian Oil chairman S. V. Narasimhan has said revenue loss on fuel sales in this fiscal year for state-owned retailers - IOC, Hindustan Petroleum and Bharat Petroleum -- could be 750 billion rupees.