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New Delhi, Jan 29: A day after UPA chairperson Sonia Gandhi practically set the agenda for the government when she told a rally in Rae Bareli that fuel prices would be reduced soon, the Centre on Wednesday reduced petrol prices by Rs 5 a litre, diesel by Rs 2 and cooking gas by Rs 25 per cylinder. The new prices became effective from midnight.

The Cabinet Committee on Political Affairs decided against raising excise and import duties as this would have pared the quantum of reduction. ``This is not the time to raise duties. It is time to pass on maximum relief to people, particularly farmers. The cuts this time have brought pump prices below the levels in June 2006 when oil was nearing its peak of over $147 a barrel,'' oil minister Murli Deora told TOI.

The farm and transport sectors are major consumers of diesel. The lowering of diesel's price is thus expected to help reduce inflation and increase the impact of the government's economic and fiscal stimulus packages.

The suggestion to free motor fuel prices of government controls too was shelved for the time being as there is a possibility that prices may have to be raised just before the Lok Sabha elections, if the firm trend coming through in the international market holds. Besides, such a move is also seen as unsustainable if a permanent mechanism is not worked out to compensate state-run oil marketing firms for their losses on cooking gas and kerosene sold through ration shops.

With the government and UPA more or less in election mode, the political imperatives clearly dominated as pressure for price cuts mounted in view of present low costs of crude. The government can be expected to be in a populist mode in the run-up to a formal announcement of the poll dates by the Election Commission and the sentiment is sure to be reflected in the speech accompanying the vote on account in Parliament next month.

Those imperatives saw Deora meet Mukherjee before the CCPA meeting to narrow down the options. Deora's pitch for a hefty reduction in pump prices was being queered by the finance ministry's demand to raise excise duty by Rs 1 on each litre and bring back a 2.5% import duty that was done away with last year as a cushion against rising prices.

Had the duty rejig been accepted, then the reduction in fuel retail prices would have been, in all probability, pared by Re 1. In that scenario, petrol price would have gone down by Rs 4 a litre and diesel by Re 1.

With international crude moving in a range of $40-45 a barrel, state-owned oil marketing firms are making a profit of almost Rs 10 a litre on petrol and less than Rs 4 a litre on diesel. But they continue to lose almost Rs 33 on each cooking gas refill and a tad over Rs 12 on every litre of kerosene sold through ration shops.

Petroleum secretary R S Pandey said the CCPA also decided that the losses accumulated by state-run oil marketing firms during crude's high run — as well those being incurred on cooking gas and kerosene sold through ration shops -- will be compensated through oil bonds. The quantum of bonds will be calculated on the basis of their audited results after the end of the fiscal.

Despite recent softening of international crude prices, state-run oil firms are expected to end the fiscal with a loss of Rs 1,01,445 crore on motor and kitchen fuel sales. This is substantially lower than the Rs 2,45,305 crore losses projected in July when global crude had peaked at over $147 a barrel. The mix of crude India buys has averaged approximately $45 per barrel this month against the December average of over $40. The Indian mix has averaged $93.61 per barrel this fiscal against an average of $79.25 a barrel in 2007-08.

While the government thrashed out the nitty-gritty, many petrol pumps ran dry as they had reduced stock in anticipation of the impending price-cut. Indeed, petrol pump owners have been keeping their stocks low since Deora's announcement that another round of cuts was in offing. After announcing a reduction of Rs 5 a litre in petrol and Rs 2 a litre in diesel prices on December 6, the oil minister had said, ``This is not the end''.