The Empowered Group of Ministers on fuel headed by Finance Minister Pranab Mukherjee has decided to up diesel prices by Rs 3 per litre, confirmed oil minister Jaipal Reddy. While addressing the press post the EGoM meet, he said kerosene prices have been hiked by Rs 2 per litre while LPG rates have been raised by Rs 15 per cylinder. The price hike is excluding value added tax (VAT). The oil ministry had earlier said there wouldn't be any hike in prices.

This hike is expected to bring some respite to the bleeding oil marketing companies (OMCs) as every Re 1 hike in diesel prices will save the exchequer Rs 6,700 crore.

Under-recoveries on diesel stand at Rs 15.44 per litre, while that on LPG is at Rs 381.14 a cylinder. Kerosene under-recoveries at present are at Rs 27.47 a litre. "This price hike would cut under-recoveries loss by Rs 21,000 crore," Reddy said.

"I am sandwiched between economists and populists. Economic problems cannot wait for political crisis," he added.

Calling the price hike "moderate", the FM said he hopes that state governments will reduce VAT so that the consumers could be relieved. "I have taken the risk of reducing the duties to a substantial amount of Rs 49,000 crore," he said.

The EGoM has also decided to cut customs and excise duties on petroleum products. The EGoM has announced a 5% cut in custom duty on fuel products. Customs duty on diesel has been cut from 7.5% to 2.5% while the 5% customs duty on crude has been abolished. This will entail a loss of Rs 26,000 crore to the government for the full year (FY12).

It has reduced excise duty on diesel to Rs 2 from Rs 4.60 per litre. This will entail a revenue loss of Rs 23,000 crore to the government for the full fiscal year.