June 2 (Bloomberg) -- India's Prime Minister Manmohan Singh said subsidies can't be allowed to rise any further, indicating his government may increase fuel prices capped since February.

``Petroleum prices don't reflect world trends,'' Singh told the Associated Chambers of Commerce and Industry in New Delhi. ``This situation cannot continue for ever. We need further political consensus to adopt more rational economic policies.''

Singh is under pressure to increase gasoline and diesel prices to alleviate shortages and narrow refiners' losses from $1 billion a week. He hasn't raised prices in the past 3 1/2 months on concern it may accelerate inflation, already the highest since 2004, ahead of national elections in a year's time.

Oil prices have doubled in the past year and reached a record $135.09 a barrel in New York on May 22. India, which imports 70 percent of its oil needs, last increased fuel prices in February, the first time since June 2006. Cooking gas prices have been capped since April 2005.

India's communist parties, whose support helps Singh's maintain a majority in parliament, said May 31 they won't allow the government to raise prices. The communists said the government should instead cut import and excise taxes on fuel.

That may widen India's budget deficit and reduce the money available for building roads, ports and other infrastructure. Finance Minister Palaniappan Chidambaram aims to narrow the deficit to 2.5 percent of gross domestic product in the year to March 31 from 3.1 percent in the previous year.

Infrastructure Needs

The government also plans to fund almost three-fifths of the $500 billion that is required by 2012 to spruce up the nation's infrastructure and accelerate growth.

Part of the loss incurred by Indian refiners for selling fuel below costs is already compensated by the government, which gives them bonds and asks Oil & Natural Gas Corp. and other state-run explorers to share the subsidy.

Indian Oil Corp. and other refiners got bonds of 112.5 billion rupees ($2.65 billion) from the government on Jan. 18 and 92.97 billion rupees on March 28. The bonds mature in 2025, the finance ministry said.

``To ensure the stability and sustainability of the growth process, we have to follow more prudent fiscal policies,'' Singh said today.

Cabinet Decision

Cabinet reached an ``in-principle'' agreement to raise gasoline prices by 5 rupees per liter and diesel by 2 rupees per liter, The Economic Times said May 31. Some cabinet members also supported halving the customs duty on crude oil to 2.5 percent and reducing import duty on gasoline and diesel to 5 percent from 7.5 percent, the paper said.

Indonesia raised fuel prices by an average of around 29 percent on May 24, the first increase in three years, to cut subsidy costs.

China, which caps fuel prices to curb inflation, said speculation that it may lift the curbs as early as next month is ``baseless.'' The government controls prices of gasoline, diesel, jet fuel, coal and power.

China Petroleum & Chemical Corp. was paid about 7 billion yuan ($1 billion) in state subsidies for oil imports in April, more than what it got for the whole of last year, according to a company official. China controls fuel prices to limit their effect on inflation, which is running near a 12-year high.

In India, rising prices have forced the central bank to raise interest rates to a six-year high. That's hurt consumption, causing the economy to expand 9 percent in the year ended March 31, the slowest pace since 2005.

India wants to accelerate growth to 10 percent by 2012 and sustain that pace to reduce poverty in the country.

``The unrelenting rise in crude oil prices threatens to disrupt the development process in oil-importing developing countries,'' Singh said today. ``It can have adverse consequences for the global war against poverty.''

To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: June 2, 2008 03:54 EDT