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The petroleum ministry is understood to be preparing a note for the Cabinet on a possible deregulation of diesel prices.
Domestic prices of the fuel are nearing market rates and are under-recoveries of oil marketing companies (OMCs) on diesel sales are likely to be eliminated in two months.
With continued monthly price hikes of 50 paise since January 2013, OMCs losses on diesel sales have fallen to Rs 1.78 a litre from Rs 3.4 a litre in the fortnight ended 15 July as worries over supply disruptions in Iraq and Libya ebbed pulling down global prices.
The Indian basket of crude oil prices fell below the psychological mark of $100 a barrel on Thursday.
The January 2013 decision of the previous United Progressive Alliance regime was silent on whether diesel prices would be freed after they achieve parity with global rates.
The decision on pricing would require the Union Cabinet's approval. A senior petroleum ministry official said no proposal related to diesel deregulation has gone to the cabinet so far. Experts say after the diesel under-recoveries are completely extinguished, the government should opt for complete decontrol of diesel prices.
"The country has succeeded to a large extent in separating price hike decisions from politics and this momentum should continue," said Leena Srivastava, honorary executive director at TERI.
The government also has the option of maintaining some administrative control on diesel prices even after the under-recovery on the fuel become zero.
Diesel accounts for 44 per cent of the country's consumption of petroleum products and any significant increase in its price could have an immediate cascading effect on inflation.
Currently, OMCs are required to take the government's approval before effecting any rate increase beyond 50 paise a litre. Total under-recoveries of OMCs in 2013-14 stood at Rs 139,869 crore (Rs 1.3 trillion).
This included losses on diesel sales at Rs 62,837 crore or Rs 628.37 billion) (45 per cent), PDS kerosene at Rs 30,574 crore (Rs 305.74 billion) and domestic LPG at Rs 46,458 crore (Rs 464.58 billion).
In the first quarter of current fiscal, OMCs lost Rs 9,000 crore (Rs 90 billion) on subsidized diesel sales out of total under-recoveries of Rs 28,690 crore (Rs 286.90 billion).
OMCs are currently incurring daily under-recovery of Rs 230 crore (Rs 2.30 billion) on the sale of diesel, PDS kerosene and domestic LPG.
