India surprises with step forward on freeing diesel prices

NEW DELHI (REUTERS) - India's government gave fuel retailers some leeway on Thursday to raise prices of heavily subsidised diesel, distancing itself from an unpopular policy ahead of elections while trying to revive an economy growing at its slowest pace in a decade.

Fuel subsidies are a drain on India's finances and the government is struggling to bring the deficit within a target of 5.3 per cent of gross domestic product for the financial year ending March. India is the world's fourth biggest oil importer.

The government emphasised that any price rises would be small, raising questions over how much freedom the state-run oil firms will really have. Petrol largely remained under government control after a similar policy was introduced in 2010.

Oil Minister Veerappa Moily said the new system gave oil companies some liberty to set prices, but cautioned that diesel subsidies could not be suddenly ended.