Upstream companies and explorers Oil and Natural Gas Corp, Oil India Ltd and GAIL have to sell crude oil and products at a discount to retailers, which sell diesel, kerosene and LPG at government-capped prices.

"The oil subsidy given in the budget has already been exhausted. So the government is working on 25,000-30,000 crore (250-300 billion) rupees more on oil subsidies to be given in the monsoon session of parliament," the source said.

The monsoon session commences on Aug. 1.

In February, the government had budget a petroleum subsidy of about 236 billion rupees, assuming oil prices below $100 per barrel. However, high global crude prices are expected to substantially inflate New Delhi's oil subsidy bill.

India's decision to raise fuel prices last month is expected to trim revenue losses for state-run oil companies by just 50 billion rupees to about 1.2 trillion rupees in this fiscal year.

Analysts say duty cut on crude and petroleum products could widen the government's fiscal deficit to over 5 percent, from the budgeted 4.6 percent of gross domestic product for the 2011/12 fiscal year, and force it to resort to higher market borrowings.

Also, a slowdown in Asia's third-largest economy is seen upsetting New Delhi's fiscal calculations.

The government source, however, said the fiscal gap target is unlikely to be missed as the government is looking to generate additional resources and trim its expenditure.

"We are drawing up alternative plans which include better tax revenue and compliance and compression of plan expenditure," the source said.

"The other thing that is being looked at is how the number of state companies for stake sale can be increased...The entire exercise should yield results and help us meet targets."

The government is planning share sales in seven companies, instead of at least four earlier, in this fiscal year, the source said, but declined to name the firms.

The source also said the government was in discussion with the planning commission on ways to reduce the planned expenditure.

The government had announced its stake sale plan in four state-run firms--Steel Authority of India Ltd, Bharat Heavy Electricals Ltd, Oil and Natural Gas Corp and Indian Oil Corp earlier.

The source said the government, which plans to raise 400 billion rupees through its divestment programme in 2011-12, is planning to sell shares in Oil India Ltd now instead of Indian Oil Corp, but did not give reasons for the switch.

Copyright Reuters, 2011