In a bold reforms decision, the government today partially deregulated diesel price allowing a hike of 40-50 paise a litre per month for retail customers and nearly Rs 11 for bulk consumers, a step that is feared will have a cascading effect on inflation.

In a bid to sweeten the bitter pill, the Cabinet Committee on Political Affairs chaired by Prime Minister Manmohan Singh today raised the quota on subsidised LPG to nine cylinders per household from six, bowing to public pressure.

State-owned oil companies in a parallel move will cut petrol price by 25 paise per litre in view of softening in cost of raw material.

The decision on diesel is expected to cut the subsidy bill by Rs 12,900 crore on account of hike in price of fuel sold to bulk consumers like Railways and state transport undertakings. Diesel accounts for 59 per cent of the estimated Rs 160,000 crore fuel subsidy bill in 2012-13.

An order issued by the Oil Ministry post CCPA decision stated that bulk users be charged market price, that will result in a hike of Rs 10.81 per litre over and above the current rate of Rs 47.15 in Delhi. The government is expected to save about Rs 9,000 crore of raise in price for retail buyers.

"We have given some liberty to oil marketing companies to raise diesel prices in small dozes. They are authorised to make small price correction from time to time," Oil Minister M Veerappa Moily said.

"They should exercise this discretion in such a manner that inflation is not impacted. Also, the entire burden is not put on consumers." Asked what small meant, he said "small means small."

Finance Minister P Chidambaram maintained that the oil companies have been allowed to make "small correction from time to time."

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