On the defensive after allowing oil marketers to hike petrol price from Friday, the government said state-run fuel retailers were left with no choice given the increasing prices of crude globally and a depreciating rupee.
In a late evening announcement, oil marketing companies (OMCs) increased prices of petrol by Rs1.80 a litre from Friday.
"The average price of Indian basket of crude oil, which was $85.09 per barrel in 2010-11, has now increased by 30 % and the average price in the current financial year is around $110 a barrel," said the petroleum ministry in a statement.
"To worsen the situation, the rupee has depreciated from 45 a dollar to over 49 per dollar in recent months. The under-recoveries of OMCs increase by about Rs8,000 crore annually on account of every Re.1 depreciation," the ministry added.
The United Progressive Alliance (UPA) government came under flak from opposition parties and even its own coalition members.
MPs from the Trinamool Congress -- a major ally of the UPA -- favoured quitting the UPA government to protest the "repeated unilateral decisions" to raise petrol prices, but chief Mamata Banerjee kept the decision pending and requested Prime Minister Manmohan Singh for a meeting after his return from Cannes where he is attending the G20 summit.
The petroleum ministry, however, said the OMCs -- Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) -- were losing on all fronts as they were incurring under-recoveries of Rs8.58 per litre on diesel, Rs25.66 per litre on Kerosene and Rs260.50 per cylinder on cooking gas. This despite an increase in the selling prices of these fuels on June 25.
Petrol is de-regulated, giving oil marketing firms the freedom to change retail prices, while they still require the government's approval to effect any changes in the prices of diesel, kerosene and cooking gas.
However, even in the case of petrol informal consultations do happen between the OMCs and the government.
"The total under-recovery of oil public sector undertakings for the year is expected to be around Rs1,32,000 crore compared to Rs78,190 crore last year," said the ministry.
For the first half of the current fiscal, the under-recoveries of the three retailers stood at Rs64,900 crore.
Despite the government giving a cash support of Rs.15,000 crore and upstream oil majors like ONGC contributing Rs21,633 crore, OMCs have declared huge losses for the first half of 2011-12.
"The combined losses of BPCL and HPCL for the first half are more than Rs12,000 crore and IOCL is also likely to be in red, if no further cash assistance is announced," said the ministry.
"The crisis faced by OMCs is evident by unprecedented level of borrowings of Rs1,29,989 crore necessitated by need for working capital and dollar requirements for payment of funds for import of crude," it added.