India has raised domestic fuel prices, in the wake of the massive surge in international crude oil prices. As Anjana Pasricha reports from New Delhi, there are worries the move will fuel inflation at a crucial time for the government, which faces elections next year.

Woman pays for gas as employee fills up tank of car in New Delhi, 04 Jun 2008

After a Cabinet meeting Wednesday, the government announced that the price of gasoline will be raised by about 12 cents a liter. Diesel will be hiked by about 7 cents. But the price of kerosene, which is widely used as a household fuel by poor people, has not been raised.

The hike in petroleum products has been widely expected following the record rise in international crude oil prices.

India has been hit hard because it imports three-quarters of its crude oil needs and its growing economy has led to a steady increase in demand for oil.

The government says a price hike is necessary to bail out public-sector oil companies, reeling under losses adding up to billions of dollars. These companies have warned that they might have to restrict oil imports because their cash reserves have eroded.

Petroleum Minister Murli Deora says the government will continue to bear the major burden of surging international prices and that the hike for consumers is "marginal."

"To protect the common man from the inflationary impact of high international oil prices, the government and public-sector oil marketing companies have been absorbing most of the burden," said Deora. "However, due to the relentless increase in the international oil prices, it has become absolutely necessary for the consumer to also shoulder a small part of the increased burden."

Petroleum product prices are heavily subsidized by the government and are a politically sensitive issue in India

Indeed, the decision to hike prices has not been easy for a government which faces general elections next year and which has vowed to fight inflation, now running at a four-year high of more than eight percent. Analysts predict the latest hike in fuel prices will further fuel inflation.

Rising prices have been blamed for a series of losses in state elections suffered by the ruling Congress Party.

Some politicians warn that, despite the latest price hike, the government's oil subsidy bill will still be huge and could force it to cut back on social spending, adding to the Congress Party's dilemma.