India's federal government approved a rise in prices of oil and petrol, amid stiff political opposition from its Left party allies.
The Cabinet committee on Political Affairs decided to raise the price of petrol by 5 rupees and that of diesel by 3 rupees. The decision has been expected for the past few days as state-run oil marketing firms have been incurring losses because of controlled fuel prices.
Murli Deora, petroleum and natural gas minister, told reporters the price rise is 'marginal'.
He also said the customs duty on crude oil has been cut to zero from the earlier 5 percent, while the excise duty on petrol and diesel is cut by 1 rupee a litre.
India raised its prices on Feb. 14, when crude was hovering around $95 per barrel, but the government has withheld any hike since then, even though world oil prices are near $124 per barrel.
Politically, the federal government is under pressure from its left allies, namely the Communist Party of India (CPI) and Communist Party of India-Marxist (CPM).
'We are against the government's decision of a fuel price hike and we will launch a nationwide agitation on the issue,' Deepankar Mukherjee of Communist Party of India (Marxist) told Thomson Financial News (TFN) by telephone.
However, the government had few options besides fuel price hikes and duty cuts, as international crude oil prices have surged and oil companies are suffering losses while prices stay unchanged.
India's state-run oil marketing companies, including Indian Oil Corp., Bharat Petroleum Corp. Ltd., Hindustan Petroleum Corp. Ltd., have so far reported losses of over 2.25 trillion rupees.
The petroleum ministry had been proposing a 10 rupees-a-litre hike in petrol prices and a 5 rupees-a-litre hike for diesel.
L K Gupta, finance director for the state-run Mangalore Refinery and Petrochemicals Ltd. (MRPL), told TFN that the government has taken an excellent and balanced decision, given the pressure on it not to raise prices because of upcoming elections next year, as losses had made the price hike inevitable.
Analysts had felt that due to political constraints the government would not hike prices in line with rising global crude prices, but today's decision will cut oil companies' losses.
Sonal Varma of Lehman Brothers (nyse: LEH - news - people ) told TFN: 'The price hike will definitely lead to higher inflationary pressures on the economy, but considering the magnitude of losses incurred by oil companies, it's a step in the right direction.'
India's annual inflation was seen at a near four-year high of 8.1 percent for the week ended May 17.
The raising of fuel prices might bring relief to India's oil companies but the government will have to convince voters it is the right thing to do, analysts said.
Prime Minster Manmohan Singh will address the nation late Wednesday to explain the reasons for the fuel price hike.
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