India buys in around 80 percent of its oil needs and the import bill has recently risen dramatically
India's government was confronted by strike threats and a political backlash Friday after hiking the price of diesel by 12 percent as a rise in inflation underscored the scale of its economic woes.
Widely accused of policy paralysis, Prime Minister Manmohan Singh approved the rise at a cabinet meeting late Thursday despite protests from coalition allies and even an acknowledgment by his own party that it would cause pain.
However newspapers said the move had become inevitable as state-run refiners had been incurring massive losses as a result of government price controls.
India buys in around 80 percent of its oil needs and the import bill has risen dramatically because of high global prices and a plunging rupee.
The move, which came into effect at midnight, sees a litre of diesel rise five rupees. The price of a litre in New Delhi had stood at 41.32 rupees (74 US cents).
Although the cost of liquefied petroleum gas cylinders, which are used for cooking, was left unchanged, the oil ministry said gas bottles would now be rationed.
Demonstrators took to the streets to express anger at the move, including a group of women who staged a cooking protest in downtown Mumbai, while transport workers met to discuss strike action.
The All India Motor Transport Congress (AIMTC), which represents about 11.5 million truckers, transporters and bus operators, said the cost of moving goods would increase.
"We want the government to roll back the price hike," Gurinder Pal Singh, a senior AIMTC member, told AFP.
There was a similar call from the Trinamool Congress, a key ally of Singh's coalition.
"We will not accept it and demand its rollback," said party president Mamata Banerjee, who is also chief minister of West Bengal state.
India's main opposition Bharatiya Janata Party (BJP) also hit out at the rise. "The diesel hike will have a cascading effect and prices of all essential things will go up," said Narendra Modi, chief minister of Gujarat and a senior BJP figure.
Even the general secretary of the main governing Congress party, Digvijay Singh, voiced fears the rise could "hurt the farmers and common man".
"At the same time, there are some unpleasant decisions that have to be taken by the government by taking an overall view of what is best for the country," he added.
India's once-booming economy grew just 5.5 percent between April and June -- the slowest in three years, while data Friday showed inflation hit 7.55 percent in August, from 6.87 percent in July.
The government deregulated petrol prices in 2010 in a reform aimed at reducing the subsidies it pays to state-run fuel refiners.
The high cost of imported fuel is partly blamed for the ballooning of India's current-account deficit to its widest level in eight years.
The Times of India said the move would drive up food prices at a time when people are already struggling to make ends meet.
"The massive hike of five rupees in the price of diesel and the removal of subsidy on cooking gas beyond six cylinders will hit the common man, already caught in a price spiral, very hard," said the paper.
But despite the widespread acceptance of the pain caused by the increases, many commentators said such shock treatment was badly needed and seen as a welcome signal of the government's willingness to confront its problems.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission, a government body that formulates national five-year economic plans, said it was vital to stimulate growth.
The "diesel price hike is a tough decision and we need lot of tough decisions to get to eight percent growth rate", he told reporters.
Indian shares rose more than two percent, spurred by hopes of further fiscal reforms after another cabinet meeting later Friday.
Reports said the government could announce a long-awaited measure to allow foreign airlines to invest in domestic carriers.
A series of economic reforms have stalled in recent months owing to an impasse in parliament sparked by a scandal over the the awarding of coal mining concessions that has been dubbed "Coalgate".