Biting the bullet, government today hiked the price of diesel by Rs 3 a litre, kerosene Rs 2 a litre and cooking gas by a steep Rs 50 a cylinder to raise Rs 21,000 crore, and slashed customs and excise duties on petroleum products, sacrificing Rs 49,000 crore a year.
The hike in prices will be effective from midnight tonight.
The Empowered Group of Ministers (EGoM), headed by Finance Minister Pranab Mukherjee, met today and took the much-deferred politically sensitive decision, which Oil Minister S Jaipal Reddy said was done to cut down on burgeoning under-recovery of oil marketing companies.
The under-recoveries which stood at Rs 1,71,140 crore will now come down by Rs 21,000 crore after today's decision.
Today's decision comes more than a month after petrol price was hiked by Rs 5 a litre.
He described the increase as "very modest and minimal".
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Giving details of the duty restructuring, Reddy said the meeting decided on elimination of 5% customs duty on crude oil and all petroleum products , that will result in a revenue loss of Rs 26,000 crore for the government for the full fiscal year.
The excise duty on diesel has been reduced from Rs 4.60 a litre to Rs 2 a litre which will entail a revenue loss of Rs 23,000 crore during 2011-12.
He said it could not be cut any further as the special excise duty and the additional excise duty have been earmarked for the central road fund and the educational cess. On both these accounts, the government will incur a loss of Rs 49,000 crore.
The price hike would lead to an increase in inflation by around 50 basis points, said Crisil Chief Economist DK Joshi. Inflation now is hovering around 9%.
After the price hike and duty cuts, the oil marketing companies would still be losing Rs 1,01,140 crore for the current fiscal.
The decision on kerosene price hike comes exactly a year after when the government had raised its rates by Rs 3 a litre.