The government is working on a dual-track strategy of fuel price hikes and duty cuts to protect the consumer as well as cash-strapped oil companies. The finance ministry has asked the petroleum ministry to work out possible scenarios of duty rationalisation and their impact on oil companies and the exchequer. This move will be politically more palatable, coming in the wake of the recent poll results in Karnataka.

An excise duty cut on petrol or diesel would bring down prices. So, even if the retail price is increased, a duty cut will mellow the effect, making net increase marginal. The consumer will thus be spared a steep hike, thanks to a duty reduction.

It is learnt that petroleum minister Murli Deora will meet finance minister P Chidambaram on Tuesday. When contacted, Mr Deora confirmed about the meeting. IOC, BPCL and HPCL have done a commendable job in distributing sensitive fuel products nation-wide. They now need help. We will protect them at whatever cost. I am meeting the finance minister and he has assured that he would do whatever is possible, Mr Deora told ET.

It is learnt that the Prime Ministers economic advisory committee chairman C Rangarajan and Mr Deora have already deliberated on the issue. Prime Minister Manmohan Singh had met Mr Deora on Friday to take stock of the situation.

It is understood from official sources that the finance ministry has asked the oil ministry to explain the projected under-recovery of nearly Rs 2,30,000 crore for 2008-09 and suggest various scenarios of duty rationalisation. The finance ministry is expected to strike a balance between bailing out the oil marketing companies (OMCs) and minimising the revenue loss to the exchequer.

In the light of the finance ministrys direction, the oil ministry is re-examining its demand to reduce customs duty on petrol and diesel from 7.5% to 2.5% and crude oil from 5% to 0%. It may also suggest some reduction on excise duty on auto fuels. In the Budget, the government had removed the 6% ad-valorem component of excise duty on petrol and diesel and fixed the duty at Rs 14.35/litre and 4.6/litre, respectively.

Sources said the duty rejig alone would not help much. Even if the excise duty is slashed by 50%, it would amount to a reduction of the OMCs under-recoveries by Rs 26,000 crore. There is a need to have a market-determined petrol price (desired increase of Rs 16/litre) that would help in reducing under-recoveries by nearly Rs 20,000 crore. Besides, a marginal increase in prices of diesel and LPG could also require, a source said.

A Re 1/litre-price increase on petrol and diesel would result in an annual saving for OMCs by Rs 1,272 crore and Rs 5,352 crore respectively. A Rs 10/cylinder increase in LPG prices would save Rs 756 crore per year.