The oil minister is grasping at desperate measures to cut the country's oil costs by nearly $20 billion after the rupee's slide to record lows has left India facing an oil bill potentially 50 percent higher than on May 1.
Oil Minister M Veerappa Moily has suggested pricking the ballooning oil bill with everything from a street theatre campaign encouraging lower fuel use, to shutting fuel stations, to increasing imports from Iran.
India's crude import bill was $144 billion last fiscal year -- the largest part of its overall import costs. India, Asia's third-largest economy, imports about 80 percent of its oil, which accounts for about 30 percent of its energy needs.
That has hit India hard over the last four months as the rupee fell 20 per cent to record lows near 70 to the dollar.
The economy is struggling with decade-low growth, a record current account deficit and a steep fiscal shortfall.
International oil prices have gained about 15 per cent over the same period. In rupee terms, the Brent oil benchmark has gained nearly 50 per cent since May 1, when faith in emerging market growth began to falter just as the US Federal Reserve started signalling it might wind down its monetary stimulus.
Economist have long pointed to India's fuel subsidies as an area where it could save money, but raising retail oil prices is a political problem when few of the nation's consumers have ever paid market rates for the fuels they use.
And elections are coming up by May 2014.
"Subsidies are something they can do something about and that is clearly something that they should address . . . but you get into this whole issue about elections and public anger," said Praveen Kumar, who leads the South Asia oil and gas research team at FGE in Singapore.
"People are angry with all that's happening with the economy and the rupee crashing. I don't see this situation can continue for too long," he said.
One step that could save $4.3 billion in oil costs, according to Reuters calculations, would be a hike of around 5 rupees per litre, or about 10 percent, in diesel prices.
An oil ministry source has suggested such an increase might come after September 6, when the current parliament session ends.
"The rupee depreciation has left us with no alternative but to pass on costs to customers," said an Indian oil company official, although noting that demand has edged lower with the higher oil prices and slower economic growth.
State-owned retailers sell diesel at subsidised prices that are currently about 10 rupees per litre below estimated true market levels.
However, total subsidies for LPG, kerosene and diesel amount to about $25 billion a year, according to FGE's Kumar, and "there's no way they can dismantle that over night."
India consumed about 1.4 million barrels per day (bpd) of diesel in 2012/2013, making up over 40 percent of the country's total fuel demand.
Nearly half of Moily's targeted savings -- $8.5 billion --
Moily is targeting raising imports to around 260,000 bpd, only about 6,000 bpd lower than the average for fiscal 2012/2013.
Boosting imports to that level would virtually wipe out cuts by India that have won it a waiver from Washington's sanctions.
"Frankly there is not much room there because they have to show that they slashed Iranian crude imports by another 15 percent or risk sanctions from the US," Kumar said.
India's July imports from Iran were just 35,500 bpd, down 82 percent from a year ago because of problems with shipping and refinery insurance coverage due to the sanctions, which aim to force Iran to curb its nuclear ambitions.
Boosting Iranian imports would also depend on whether Tehran was willing to continue to be paid in rupees, which are not only falling against the dollar but also cannot be traded freely on global markets.
The two countries already cannot balance their trade.
Buying oil in dollars is putting huge pressure on the rupee and the RBI has now told state-run oil refiners they must buy their dollars from it, effectively taking 10 per cent of daily demand, or some $500 million, out of the spot currency market.
These dollar swaps can be for up to six months, leaving the risk of further depreciation with the refiners, who must hope the rupee gains before they have to pay back the Reserve Bank of India.
"Our people (refiners) are not happy. They feel that if they had done it directly, they could have got a slightly better deal or could have hedged their foreign exchange risk to some extent," said an oil ministry source.
The state refiners have asked for a cap on possible losses or the chance to roll over the swaps if the rupee moves against them.
State refiners, who also sell petroleum products domestically, include Indian Oil Corp Ltd, Hindustan Petroleum Corp and Bharat Petroleum Corp.
Other measures suggested by Moily in letters sent to the prime minister and the finance ministry included a $2.6 million public relations campaign that would use ‘street theatre’ to promote lower fuel usage, which he said could save about $2.5 billion.
On Sunday, Moily also suggested that petrol stations could be shut at night to curb demand -- but this was dropped after an outcry from the opposition.
India's overall crude imports rose 10.3 percent in the first seven months of the year, according to trade data, as New Delhi tries to keep the lights on to power faltering growth in Asia's third-largest economy.
India is the world's fourth-biggest energy consumer after the United States, China and Russia but about a third of its population still lacks electricity.
(Additional reporting by Florence Tan in Singapore, Prashant Mehra in Mumbai and Malini Menon in New Delhi)