Chidambaram Says India Considers Freeing Oil, Gas Prices

India is considering freeing prices of oil and natural gas drilled locally from state controls in a bid to lure more foreign investment, Finance Minister Palaniappan Chidambaram said.

“We are at an advanced stage -- a cabinet paper is under consideration on how to move from an administratively fixed price to a market-related price for oil and gas explored and excavated by companies,” he told investors in Toronto as he started a tour of Canada and the U.S. to woo investors.

Measures to cap prices of diesel and cooking gas to make them affordable to farmers and poor households, a significant voting bloc, have widened the budget deficit. A threat of a sovereign credit downgrade to junk by Standard & Poor’s and Fitch Ratings has prompted Chidambaram to rein in subsidies amid the slowest pace of economic growth and the biggest 12-month decline in foreign direct investment in a decade.

While India has allowed state-owned refiners to sell gasoline at market rates, it has only partially freed diesel prices, allowing companies to raise them gradually until they wipe out losses from below-cost sales in about two years.

A panel headed by Chakravarthy Rangarajan, chief economic adviser to Prime Minister Manmohan Singh, has recommended benchmarking gas rates to global prices, a move that may boost production of the fuel by companies including Reliance Industries Ltd.

Reversing Slump

Chidambaram, 67, a Harvard Business School graduate and third-time finance minister in India, has been visiting major global financial centers since January as he seeks $75 billion in two years to fund the current-account gap, which widened to a record 6.7 percent of gross domestic product in the quarter ended Dec. 31.

In his budget on Feb. 28, he outlined a plan to narrow the budget deficit to 3 percent of GDP by the 12 months through March 2017, from an estimated 5.2 percent for last year.

Singh’s administration is trying revive the $1.8 trillion economy, which probably expanded 5 percent in the year ended March 31, compared with an average 8.8 percent in the six fiscal years through March 2011.

The shortfall in the current account, the widest measure of trade, and elevated inflation have limited the central bank’s scope to cut interest rates. India’s consumer-price inflation remains the fastest among major emerging economies even as it eased to 10.39 percent in March from a year earlier, according to data released on April 12. Reserve Bank of India Governor Duvvuri Subbarao has said price gains remain “stubborn and elevated.”

Chidambaram said he “hopes” the Reserve Bank of India has taken note of the recent easing of inflation after the benchmark wholesale-price index in March cooled to an unexpected 5.96 percent, the smallest gain in 40 months.

The central bank has cut its policy rate by 50 basis points so far this year to spur growth.

The government is also keen on replacing the production-sharing model for oil and gas exploration with a revenue-share model, Chidambaram said.

Before it's here, it's on the Bloomberg Terminal.