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Why India's Fuel Prices Are Sky-High When Oil Isn't

Will India restore fuel subsidies?

Will India restore fuel subsidies?

Photographer: Hindustan Times/Getty Images

With rising crude prices still at half their record high, drivers in much of the world are still enjoying pain-free visits to the pump. That’s not the case in India, where diesel, the most-used fuel, is more expensive than ever before, and gasoline prices also are hovering around record levels in several cities. India lifted controls on diesel pricing four years ago, after freeing gasoline rates first. But with federal elections next year and several state elections in the coming months, the government is feeling the pressure to restore a lid on fuel prices. None of its options are particularly pretty.

A big reason was to relieve the government’s massive burden to subsidize fuel. Subsidies had ballooned to $9.6 billion in the year ended March 31, 2014. About seven months later, subsidies on diesel were called off. State-run explorers Oil and Natural Gas Corp. and Oil India Ltd. and state gas utility GAIL India Ltd. also had been paying to subsidize fuel prices, to the tune of $10 billion, by selling crude and fuels to the state retailers at discounts. Making matters worse, the lag in payment of subsidies by the government messed up the finances of state fuel retailers Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp., which were forced to borrow heavily to bridge the gap between the selling price and their cost.