The government plans to cap the price of crude oil sold by ONGC and Oil India to state refiners at USD 54 per barrel this financial year despite an average market price of USD 110 per barrel to help them sell diesel, kerosene and cooking gas below market rates.

The move, which is under inter-ministerial consultation, will severely hurt finances of ONGC but ease government's subsidy burden and help it in containing fiscal deficit, government officials said requesting anonymity.

Government officials said that the finance ministry has expressed deep concern over widening fiscal deficit and has proposed a new subsidy-sharing formula where larger contributions are sought from upstream firms such as ONGC.

One official said that "The proposal is part of the finance ministry's fiscal management plan.”

Finance minister Pranab Mukherjee raised concerns about the fiscal situation on Saturday and said India should learn lessons from the Euro-zone crisis and it should not allow fiscal deficit to go beyond a certain limit.

Officials said that it is estimated that state oil firms Indian oil Corp, Hindustan Petroleum and Bharat Petroleum would incur about INR 140,000 crore revenue loss in 2011-12 for selling fuel at controlled rates. So far, the finance ministry has agreed to provide INR 30,000 crore to oil companies, which have suffered a revenue loss of INR 64,900 crore and a net loss of INR 23,440 crore in the first half of 2011-12.

Officials said state fuel retailers were already in red and they could not absorb any losses. One official said that "As the government has limited resources, upstream firms have to bear a larger burden. After all the government has given them oil blocks on nomination basis (without global biddings).”

Officials said that the government would not hesitate to impose a heavier burden on upstream firms if international crude oil prices surge further.