But markets and the industry have instantly cheered a move aimed at boosting a failing economy and sources in the government say it is unlikely to go back on this decision.
Allies like a "shocked" Mamata Banerjee and the DMK have demanded that the hike be withdrawn, as has Mulayam Singh Yadav. And the main opposition party, the BJP, has threatened an agitation if it is not.
But the ruling Congress, say sources, has made its calculations. Faced with the threat of becoming the first in the BRICS (Brazil-Russia-India-China-South Africa) group of emerging economies to be downgraded to junk, the economic imperatives of the government far outweigh political expediency. In biting the subsidy bullet yesterday, the Congress has factored in the political flak it will face as it heads into assembly elections in Gujarat and Himachal Pradesh. The petroleum minister will be fronted to explain why this hike was the need of the hour.
The government received a big thumbs up from the Industry and the Markets. The Sensex was trading at a seven-month high on Friday morning on reform hopes. The decision on fuel was symbolically important as a signal that the government, seen for many months as afflicted by a policy paralysis, is now active on the reforms front. It is set to follow up yesterday's tough decision with a meeting today to discuss norms to allow foreign direct investment in the aviation sector. "The symbolism of the move is huge. One of the biggest criticisms against the current government has been its inability to take politically tough decisions that are economically sound," said Sajjid Chenoy, JP Morgan's India Economist.
Political parties across the spectrum will keep the pressure up. They are worried, they say, that the hike in diesel prices will hit the aam aadmi or common man with increased prices all around at a time when he is battling high inflation.
But allies have reacted sharply and say, once again, that they were not consulted. The DMK's M Karunanidhi has suggested that UPA chairperson Sonia Gandhi immediately convene a meeting of the alliance's coordination committee. The UPA coordination committee was set up recently to help keep allies in loop on critical policy decisions. Mr Karunanidhi said, "The hike would further affect the poor and the salaried class who are already reeling under high prices of essential commodities."
From Kolkata came a familiar threat. Mamata Banerjee said, "If people do not mind, I will be most happy to withdraw support (to the UPA). If I withdraw support then other parties will provide support to them. And, then ask why we left the UPA which led to its collapse. People had misunderstood us when we had withdrawn support earlier. Therefore, we are having a detailed discussion in the party on these issues," she added, announcing here party would hold a protest rally on Saturday.
The Trinamool's lone minister in the cabinet, Mukul Roy, did not attend the Cabinet meeting that decided on the fuel price hike and will also not attend a cabinet meeting today that's scheduled to discuss relaxation of Foreign Direct Investment (FDI) norms in airlines.
The BJP is already in protest mode. "We warn the government to stop playing foul with the aam admi. This is an atrocious attack on the expectations of the aam aadmi. BJP would like to tell the government that if raised prices are not rolled back then the BJP shall take to roads to express sharp reaction. The Government can cut down on its expenses. It can stop unnecessary expenses, those ministers who move around in cars with red beacons utilize diesel only, those costs should be cut down but government is not doing that," party spokesperson Shahnawaz Hussain said.
BJP leader Sushma Swaraj hit out at the Congress President Sonia Gandhi directly for the cap on LPG cylinders. She posted on Twitter, "We have a massive loot of national resource like Coal on the one hand. The Government is now robbing the common man to pay for that loot. Strange are the policies of this Government which got elected in the name of the common man.
"They have demolished the kitchen of a lady who is to manage the house. How can a lady manage a family of five on half a cylinder of LPG a month ? The Government says that a family will get 6 Cylinders a year on Rs.399/- each. The remaining Cylinders will have to be purchased for Rs.750/- a Cylinder. I wish the Woman President of the Congress Party had felt the problems of a lady of the house.
"We have raised the issue of price rise in every session. However this unsympathetic Government neither listens nor does anything worthwhile. BJP will mobilise a nation-wide mass movement to oppose this hike."
The Samajwadi Party, which provides external support to the UPA, also said it wants an immediate rollback. "The decision is ill-timed and will hurt the common man," Uttar Pradesh Chief Minister and Samajwadi Party leader Akhilesh Yadav told NDTV.
Politically, even the Congress has had to say that it was not in favour of such a steep hike. General Secretary Digvijaya Singh said, "We are not in favour of a hike in diesel prices to such an extent because it hurts 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."
Rashid Alvi of the Congress was sombre as he said, "It is a difficult step for the government. In our country more than 70% of crude oil is imported, we have to depend on international market. Today, prices have risen in international market and therefor the government was compelled to take such a step."
Yesterday, the government raised the price of diesel by Rs. 5 per litre but left kerosene and petrol rates untouched. It also decided to restrict the supply of subsidised cooking gas to six cylinders per household in a year.
While prices of petrol have been deregulated, diesel is a partially deregulated product. In the past two years, diesel prices have been hiked twice.
The government subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has put a severe strain on public finances.
The government has acknowledged earlier that a price hike is essential for curbing fiscal deficit, a pre-condition for reviving growth in Asia's third-largest economy. A price increase will also aggravate inflation, as costs, such as road freight rates, will rise.
(With inputs from agencies)