New Delhi  - India's United Progressive Alliance (UPA) government announced a marginal hike in fuel prices on Wednesday to curtail losses of state-owned oil firms.

The decision came after weeks of wrangling with political allies who said it would add to inflationary pressures and have a negative impact on their electoral prospects.

The decision, expected to affect consumers across the board, has been a tough one to take with a spate of state elections scheduled over the next few months and general elections due in 2009.

Federal Petroleum Minister Murli Deora announced a 10 per cent rise in petrol, diesel and cooking gas prices after a cabinet meeting early Wednesday.

India's state-owned refineries, which buy crude at global prices but retail refined products at much lower state-set rates, had been lobbying for a 20 per cent hike to bring prices near par.

The companies say they are together losing 105 million dollars a day with global crude touching 125 dollars a barrel. Some of the companies said last week they may be forced to cap supplies if prices were not raised, as they had funds to import crude for only another two to three months.

India imports 70 per cent of its crude oil needs.

The government also did away with customs duty on crude oil imports Wednesday in an effort to protect the oil companies.

The price of petrol, which costs 45.53 (about 1.06 dollars) a litre in national capital Delhi, would cost 5 rupees more, while diesel which sells at 31.48 would rise by 3 rupees, Deora said.

The Indian economy posted 9 per cent growth in the financial year ending in March, but government data indicates a slowdown to about 8 per cent in the past couple of months.

The country is also reeling under high inflation, currently at a four-year high of about 8.1 per cent. The hike in fuel prices is bound to increase inflationary pressures, analysts said.

Deora said there was still a huge gap in the domestic regulated prices of the fuels and the global cost price, and the government and public sector oil companies would continue to absorb most of the burden in order to protect consumers. The Petroleum Ministry had been lobbying for a 20 per cent hike.

India has raised fuel prices only twice in two years and even on this occasion did not raise the price of kerosene, a fuel used widely among poorer sectors of the population.

The UPA's left allies had lobbied for keeping current prices while reducing duties.

Prime Minister Manmohan Singh had hinted Monday that the hike was inevitable given the surge in global oil prices. "We cannot allow the subsidy bill to rise further. Nor do we have the margin to fully insulate the consumer from the impact of world commodity price and world oil price inflation," he had said.

Singh was expected to give a televised address to the nation Wednesday explaining the reasons behind the oil price hike.

Singh's Congress Party has lost several key state elections and surging inflation is expected to have negative impact on its future electoral prospects. (dpa)