The Finance Minister, official sources said, will be writing letters to the state CMs to explain the rationale of the price hike and the need to reduce sales tax on cooking gas to give some relief to the aam admi.
While raising the prices of diesel, LPG and kerosene, the central government also decided to slash duties, which would result in a revenue loss of Rs 49,000 crore per annum.
In order to partly neutralise the impact of the price hike, West Bengal Chief Minister Mamata Banerjee yesterday decided to withdraw sales tax on cooking gas. The decision would reduce the price of a cylinder of LPG by Rs 16.
In view of the widespread protests against the price hike, the Congress has also asked its Chief Ministers to look at the possibility of providing similar relief to the common man.
The Group of Ministers (GoM), headed by Mukherjee, on Friday decided to raise the price of diesel by Rs 3 per litre, cooking gas by Rs 50 per cylinder and kerosene by Rs 2 per litre.
The price of petroleum products was raised to compensate the oil marketing companies, which are incurring losses on account of the increase in prices of crude in the international market.
Citing revenue sacrifice by the central government, the Petroleum Ministry, too, has appealed to the states to cut levies on petroleum goods to reduce the burden of the price hike on consumers.
The Centre, it added, "has now removed customs duty on crude oil, reduced customs duty on petroleum products and sharply reduced excise duty on diesel. Through these measures, the government has sacrificed revenue of Rs 49,000 crore per annum... The state governments, like the government of India, could also reduce their taxes to help the consumers."
Mukherjee too, while describing the price hike as modest, had earlier urged the states to reduce taxes on petroleum goods to give relief to consumers.
"I do hope the states will also reduce their VATs (Value Added Tax) so that relief could be given to the consumer," the Finance Minister had said.
The price of crude oil in the international market, according to Petroleum Ministry, has gone up from USD 75 per barrel in June, 2010, when the prices of diesel, kerosene and LPG were raised last, to USD 110 per barrel. India imports about 84 per cent of its total crude oil requirement.
Despite Friday's increase in prices, the government will have to provide a subsidy of Rs 6.13 per litre on diesel, Rs 353.72 per cylinder of LPG and Rs 24.98 per litre of kerosene. The total burden on the oil marketing companies has been estimated at Rs 1.22 lakh crore.
Responding to the argument that the diesel price increase would fuel inflation, which is current hovering at about 9 per cent, the Petroleum Ministry said, "There is a need to remember that uncontrolled increase in government subsidy burden would also lead to inflation through increase in fiscal deficit."
But for the oil price hike, it added, "the oil supplies may run into a problem".
The chairman of the Prime Minister's Economic Advisory Council (PMEAC), C Rangarajan, while welcoming the price hike decision, has admitted that it would push inflation into the double-digit zone.
Headline inflation stood at 9.06 per cent in May.
"Due to the hike, inflation could be close to 10 per cent by July," he said, adding that the rate of price rise would moderate after an initial surge.
"I do expect that after initial correction, inflation will come down to 6.5 per cent by March, 2012," Rangarajan said.