Mongolia broke ground on Friday for the construction of the country's first oil refinery with the help of a $1 billion loan from India to ease its dependence on Russian fuel.

India's Home Minister Rajnath Singh attended the ceremony along with Mongolian Prime Minister Khurelsukh Ukhnaa in a remote corner of the Gobi Desert.

Mongolia hopes the project will boost the economy and reduce its dependence on foreign gasoline imports. Nearly all of its petroleum products come from Russia.

The refinery and associated pipelines and power plant are being funded with a 20-year $1 billion loan from India's export-import bank.

The project could boost Mongolia's gross domestic product by up to 10 percent, according to a government statement.

The economy of the landlocked country sandwiched between Russia and China has struggled in recent years and has been propped up by a $5.5 billion IMF bailout.

The refinery will have capacity to process 1.5 million tonnes of oil annually, according to Mongol Refinery, the state-owned company that will build the plant.

The plant will employ 600 workers and construction is expected to take four years.

It is expected to produce annually 560,000 tonnes of gasoline, 670,000 tonnes of diesel fuel and 107,000 tonnes of liquified gas.

More than 500 kilometres of pipeline will be needed to transport the crude oil from Mongolia's oil fields in Dornod province.

The fields are operated by PetroChina Daqing Tamsag, which has exported 2.8 million barrels through the first five months of this year, according to the National Statistical Office.

China is currently the recipient of nearly of Mongolia's crude oil.

Mongolia imported 144,000 tonnes of gasoline worth $97.4 million in the first five months of this year. In the same period it imported from $206.8 million worth of diesel.

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