Bal Krishna Chaturvedi, the Planning Commission's member in charge of energy, said he hoped oil retailers would be allowed to set diesel prices based on market rates within months, adding that such a move would have a minor impact on inflation.

Chaturvedi, who is also in charge of infrastructure, said India's infrastructure spending would rise to 10 percent of GDP in 2012-2017, or roughly $1 trillion, from around 6 percent currently, and would include adding 100,000 megawatts of power generation capacity.

India axed controls on petrol prices in June to bolster its fiscal health, but the move sparked massive street protests and led to the opposition paralyzing Parliament. A similar move has been announced for diesel, but no timeline has been given.

Free pricing is key for firms like Reliance Industries to open retail outlets and compete with state firms such as Indian Oil, which sold fuel at subsidized rates.

"Just now is the right time, because the (crude) prices are around $70-80, stable," Chaturvedi said in an interview late on Thursday. "All the prognosis is that they are not likely to rise and if we do it now it will be a good thing."

"The impact on inflation will be absolutely minimal," Chaturvedi, a former oil secretary who authored a 2008 report recommending freeing up retail fuel prices, said.

Crude oil was at around $78 a barrel on Friday, similar to what it was at when India freed petrol prices, and has been trading in a stable band.

While Prime Minister Manmohan Singh has promised to free diesel prices, he will have to overcome resistance from allies to his government who worry about the impact of high prices on elections planned in eight states this year and next.

Headline inflation is on track to hit 11 percent in July, which would make it the sixth straight month in double digits. New Delhi expects it to ease to 6 percent by December, although many economists expect the figure to be closer to 8 percent.

Freeing gasoline prices and raising the price of other fuels is expected to add about one percentage point to inflation, with the full impact expected to be reflected in July.

Chaturvedi said the government could move in if market prices soared by offering subsidies to state-run oil retailers to sell fuel at cheaper rates.

"(The windfall tax) will provide a financial support to see that oil prices are not raised unduly high," he said. "If necessary, (fuel) taxation can be modified."

Officials were also examining whether such a tax on private explorers was consistent with their existing contracts with the government, he added.

Fuel taxes make up more than half the pump price in India and are a major contributor to state and federal revenues.

Chaturvedi left open the question of how private retailers, who have just started reopening outlets after petrol prices were deregulated, would fare if the government intervened in prices.

"The government can only provide, as of now, subsidies to its own companies," he said. "As far as private companies are concerned, they will have to work out a strategy."

India plans to spend $1 trillion on infrastructure between 2012 and 2017, compared with $500 billion in 2007-2012, half of which it wants to come from private sources. However, India has consistently missed targets on building roads, ports and power plants, crucial for accelerating its economic expansion.

While plans were still being framed, Chaturvedi said they include adding 100,000 MW of power generation. By comparison, India will add only about 62,000 MW in the current five-year period compared with the target of 78,000 MW.

That record would improve as planning grows beyond the teething troubles of managing such rapid additions, he said.

"Many of these had initial hiccups," Chaturvedi said. "Those issues have all been settled. Now the groundwork has been done, the framework is in place."

India aims to cut congestion in ports by reducing utilization to 70-75 percent from around 88 percent now, he said.

"We feel whether it is ports or rails or roads or metros, infrastructure investments will pick up. We should go full steam."