The government, set to review fuel prices next week, is under strong pressure from coalition allies to cut excise duty on petrol to partially roll back petrol prices. But, Finance Minister Pranab Mukherjee said the hike was necessary because of soaring international oil prices.

Oil firms have raised petrol prices by Rs 2.95 a litre, the fifth and steepest rise since June 26, when oil companies were given the freedom to raise petrol rates but coalition allies of Prime Minister Manmohan Singh are worried about the political fallout of higher prices particularly in states where assembly elections are due.

Some coalition partners say that the government can cut taxes instead of raising retail prices. The Central excise duty of Rs 14.35 a litre, more than a quarter of the pump price after the hike, gives the government room to absorb higher crude costs without raising retail prices , some ministers have argued.

The suggestion has come from the coalition allies who are members of the empowered group of ministers (EGoM), the top government body for fuel pricing, he said.

"Most of EGoM members are in favour of reducing duty on petrol and pass the benefit to consumers. But the group will take a final call," the member said.

The group's December 22 meeting is tentative as there is no confirmed participation yet from FM, who is EGoM chairman.

The finance minister said in Kolkata late on Wednesday that oil companies had to raise prices because international crude oil prices have risen. Crude oil futures have soared above $91 a barrel, rising by nearly 20 percent since petrol prices were decontrolled in June.

Members of the EGoM include agriculture minister Sharad Pawar (NCP), rail minister Mamta Banerjee (TC), who faces assembly elections next year, fertiliser minister MK Azhagiri (DMK). Congress party's representatives in the group are oil minister Murli Deora and power minister Sushilkumar Shinde. Planning Commission deputy chairman Montek Singh Ahluwalia is also a member in the group.

The EGoM meeting has been called primarily to consider the demand of state oil companies that diesel rates should rise Rs 5.40 per litre although the oil ministry wants to increase prices by about half of that.
Pump pricing of diesel, which the government agreed in principle to decontrol, on June 26, is still regulated by it to save its inflationary impact on the economy.

State-run oil companies Bharat Petroleum (BPCL, Indian Oil Corp (IOC) and Hindustan Petroleum Corp Ltd (HPCL) enjoys petrol pricing freedom from June this year. BPCL has raised petrol prices by Rs 2.95 a litre on Wednesday to partly make up for higher cost of crude oil. IOC and HPCL will raise petrol price at their respective pumps almost same amount on Thursday.