The Manmohan Singh government has bitten the bullet on fuel prices in the face of huge opposition not only from allied parties, but even within the Congress.

The Cabinet Committee on Political Affairs on Thursday approved aRs. 5 hike in the price of diesel. The hike is effective from midnight tonight.

The decision was taken at a meeting at the Prime Minister’s residence in New Delhi.

The price of petrol, LPG and PDS kerosene were left unchanged.

The government has also cut the excise duty on petrol by Rs. 5.3 per litre to offset underrecoveries of Rs. 6 per litre that the oil companies are incurring now.

The government will save Rs. 19,000 crore through the diesel hike, and Rs. 2,000 crore from the cap on LPG cylinders.

The government has also capped subsidized LPG cylinders to six per family.

Reacting to the hike, C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said the government had taken the right decision, and that fiscal deficit had to be contained.

The decision was also lauded by automobile association SIAM, with president S. Sandhiliya saying the hike was a " very good decision and I am happy very happy that the government has bitten the bullet as it is extremely important, and is in line with the recommendations".

Earlier in the day, the Finance Ministry had proposed a hike of at least Rs. 100 per cylinder in the price of LPG and Rs. 4 per litre for diesel.

The government subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has put a severe strain on public finances.

The government has acknowledged earlier that a price hike is essential for curbing fiscal deficit, a pre-condition for reviving growth in Asia's third largest economy. A price increase will also aggravate inflation, as costs, such as road freight rates, will rise.

State-run oil marketing companies are losing Rs. 550 crore everyday on under-recoveries as a result of higher crude prices in the global markets. They make a loss of Rs. 17/litre on diesel sales, Rs. 32.7/litre on kerosene sales, and Rs. 347/cylinder on cooking gas sales every day.