The price hike is being considered as the government scrambles to find ways to meet an unprecedented Rs 160,000 crore deficit expected this fiscal on selling diesel, cooking gas (LPG) and kerosene below their market price.
Diesel prices, which are regulated by the government, were last revised on September 14 by a steep Rs 5 per litre. Kerosene rates have not changed since June last year.
State-owned oil companies currently sell diesel at a loss of Rs 9.28 per litre and the hikes over the next 10 months will eliminate all of the losses on account of subsidies towards diesel, which is the most consumed fuel in India.
Earlier today, Prime Minister Manmohan Singh had said that subsidies on energy products should be limited, with a phased adjustment of prices.
"Unfortunately, energy is under-priced in our country. Our coal, petroleum products, and natural gas are priced well below international prices. This also means that electricity is effectively under-priced," he said.
"Immediate adjustment of prices to close the gap is not feasible, I realise this, but some phased price adjustment is necessary," the PM added.
High subsidies have widened the government’s fiscal deficit, limiting its elbow room to spend on infrastructure and development schemes.
In November, subdued tax revenue and higher spending on subsidies forced the government to revise its fiscal deficit target to 5.3 percent of gross domestic product (GDP) for the current financial year from a previous target of 5.1 percent.
State-owned Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp have together lost Rs 85,586 crore on selling diesel, domestic LPG and kerosene at below market rates in the first six months of current fiscal. Of this, Rs 52,711 crore was on account of losses on diesel.
(With inputs from PTI)