India's oil minister said on Friday the government would review domestic fuel prices next week.

Unlike Indonesia, where subsidising fuel prices via budget allocations has led to turbulence in its financial markets, the bulk of higher oil price pain in India is borne by state-run oil refiners such as Indian Oil Corp., Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd.

Refiners say they lost 203.1 billion rupees ($4.6 billion) in revenue last year due to the price freeze. Finance Minister Palaniappan Chidambaram has said refining and retailing firms will incur a loss of 300-400 billion rupees in the year to March 2006, if crude prices remain high and retail prices unchanged.

This would translate into lower dividends for the government. Last year it earned 207.98 billion rupees from state run firms, the bulk from oil refiners, and this year dividend earnings are budgeted at 235 billion rupees.

POLITICALLY SENSITIVE

Gasoline retails in New Delhi are about $0.93 per litre, one of the highest state-regulated prices in Asia and nearly double China's $0.51, largely due to heavy government taxes.

Chidambaram and the powerful Deputy Chief of the Planning Commission, Montek Ahluwalia, say price increases are inevitable.

But the government may drag its feet until an election in Bihar, one of the poorest states, is out of the way. Bihar votes in October and November and has been ruled for 15 years by the Rashtriya Janata Dal, a key member of the Congress led coalition.

"The government might not want to bite the bullet and raise fuel prices before the Bihar election," said Indranil Pan, Chief Economist at Kotak Mahindra Bank in Mumbai. "The electorate can be pretty sensitive to any fuel price increase and this could translate into lost votes."

The government will also face opposition from its communist allies, who want a cut in taxes, which account for 35 to 57 per cent of pump prices, to enable refiners to get better returns.

The communists scored a major victory in August when the government abandoned a push for asset sales to strategic investors and lowering its stakes in state run banks to less than 51 per cent, which underpinned their sway over economic policy.

"Getting the left parties to agree to even a small increase in prices will be a challenge to this government," said Rajeev Malik, Economist at JP Morgan, Singapore. "The government will opt for a small price rise and a cut in excise duty."

The finance ministry is opposed to duty cuts because of the high fiscal deficit. Oil accounted for 44 per cent of the total excise duty collection of 909 billion rupees in 2003-04, and 22 per cent of customs duty revenue of 48.61 billion.

And while costlier fuel would pose a headache to the Central Bank, it would prefer to see the pass-through and act on it, rather than have a freeze hurt government finances.

"Pass through of crude prices continues to remain the most critical factor influencing domestic inflation," it said. "Credible commitment of policy to fight inflation is critical to stop translation of higher oil prices into wage price spirals."