Aug. 19 (Bloomberg) -- Reliance Industries Ltd., operator of the world's third-biggest refinery, may sell diesel to Indian Oil Corp. and other state-run refiners after the federal oil ministry said it will seek tax breaks for the purchases.

The oil ministry will back a proposal to let Reliance Industries Ltd. sell the fuel domestically without losing export- tax incentives, R.S. Pandey, the senior-most bureaucrat in the petroleum ministry, said in New Delhi today. India's most profitable company enjoys tax benefits for earning foreign currency on exports from its 660,000 barrel-a-day Jamnagar unit.

Diesel demand in the world's second-fastest growing major economy increased 18 percent in the three months ended June. Delayed monsoons reduced hydropower generation and increased demand for small generators in homes and offices, and for electricity to operate water pumps in farms, according to Indian Oil, the nation's biggest refiner.

India may also import as much as 3.5 million metric tons of diesel this year to meet rising demand, Indian Oil Chairman Sarthak Behuria told reporters today. Indian refiners sell about 50 million tons of diesel a year, Behuria said.

The country may charge users of diesel to produce power and industry consumers more for the fuel, Pandey said.

State-run refiners are forced to sell to retail and bulk customers at prices that are capped by the government as India seeks to curb inflation stoked to its highest in 16 years by crude oil prices that have risen 58 percent in a year.

Indian Oil is renegotiating annual contracts for more than 7.5 million metric tons of diesel sales to buyers including Indian Railways, state-run transportation companies, and the army and navy as global crude-oil prices soar, Executive Director S.K. Gupta said on June 11.

India raised diesel prices by 9 percent and gasoline costs by 11 percent on June 5 to help refiners narrow more than $50 billion of revenue losses. The country's inflation rate reached 12.44 percent in the seven days to Aug. 2.

To contact the reporter on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.

Last Updated: August 19, 2008 10:23 EDT