The Indian government is all set to increase the price of oil to save the public sector oil companies, which are on the verge of bankruptcy due to the huge losses they are incurring on account of the heavy subsidy on fuel.

The Cabinet will meet on Wednesday to decide on raising fuel prices that have been necessitated by the relentless rise in international crude oil prices. Seventy per cent of India's total demand for oil is met through imports.

"We are still discussing the issue and a Cabinet meeting is scheduled for tomorrow," External Affairs Minister Pranab Mukherjee told reporters on the sidelines of an industry event in New Delhi on Tuesday.

He, however, refused to comment any further on the Cabinet agenda.

With consensus on raising petrol, diesel and domestic LPG prices still eluding, the Cabinet Committee on Political Affairs will meet early Wednesday morning.

If a consensus is hammered at the CCPA meeting, the Cabinet Committee on Economic Affairs may be convened, government sources said.

"The delay -- in the unavoidable announcement about hiking oil prices -- is due to the government's dilemma over fixing the quantum of hike. The government has been aware of this crisis since many months. Whenever a meeting about hiking oil prices was convened, no decision could be taken, as there was no consensus about the quantum of the hike between the government and the Congress party," said a Cabinet minister whose ministry is affected by the hike in international price of oil that has crossed the $130 per barrel mark.

"There was no point in increasing the price by Re 1 or Rs 2 and the government didn't have the courage to increase it by Rs 8 or Rs 10. A lot of time was wasted in deciding the politically correct quantum," he said.

He claimed that the government is unlikely to increase the price of petrol by more than Rs 5 per litre.

Meanwhile, oil companies have lost millions of rupees and inflation has surged to 8.1%.

A source in the Prime Minister's Office says that a major component of the current high rate of inflation is the unprecedented subsidy on oil products.

Prime Minister Manmohan Singh said on Monday, "We cannot allow the subsidy bill to rise any further. Nor do we have the margin to fully insulate the consumer from the impact of world commodity and oil price inflation."

A Cabinet minister says, "Even if his decision is opposed, Dr Singh never picks up a fight with the party."

"All these days, the government has been unable to take a decision about hiking the price of oil due to political compulsions," he said.

"The fear of the Left Front's reaction has prevented the Congress from taking an early decision about the matter. Even the Congress is divided on the issue of hiking the price of oil, and this indecision is having a devastating impact on the country's economy," he adds.

Even after Dr Singh explained the critical situation to United Progressive Alliance chairperson Sonia Gandhi, a group of Congress leaders persuaded her against taking a decision in hurry.

Oil prices have been rising globally since many months, but the Congress has avoided taking a political call about the issue, for a variety of reasons. One of the reasons was their fear of the impact of a hike in oil prices on the Karnataka elections.

With the surge in global oil prices leaving a Rs 2,25,040 crore (Rs 2,250.4 billion) revenue deficit with oil companies, Singh has over the past one week held several rounds of consultations with senior ministers and UPA Chairperson Sonia Gandhi but a consensus has eluded the government.

Petroleum Minister Murli Deora, who has been pushing for a Rs 10 a litre hike in petrol, Rs 5 per litre increase in diesel and Rs 50 per cylinder raise in LPG prices, has readied a note for consideration of the Cabinet.

However, the hike may be moderated to Rs 3, 5 or 7 a litre on petrol and Rs 2, 3 or 4 a litre on diesel. LPG prices may be raised by Rs 20 per 14.2-kg cylinder, sources said.

The recent reverses suffered by the ruling Congress in Karnataka Assembly elections and inflation rate climbing up to 45-month high of 8.1 per cent are underpinning government's willingness to take drastic measures.

Finance Minister P Chidambaram has vehemently opposed a duty cut to cushion the impact of global prices and is also against raising prices as it may fuel inflation.

At current global oil prices, India's oil subsidy bill may shoot up three times to 2.2 per cent of the GDP this year.

State-run fuel retailers Indian Oil [Get Quote], Bharat Petroleum and Hindustan Petroleum face a revenue loss of Rs 2,25,040 crore on sale of petrol, diesel, domestic LPG and kerosene this fiscal on not being allowed to align retail prices with cost.

BPCL [Get Quote] and HPCL [Get Quote] would run out of cash to even import crude oil in July while IOC can sustain imports till September.

The three firms, who till last week were losing Rs 16.34 a litre on petrol, are incurring a loss of Rs 21.43 on sale of every litre since June 1. Similarly, the losses on diesel have widened to Rs 31.58 per litre from Rs 23.47 while on kerosene they have jumped to Rs 35.98 from Rs 28.72 per litre.

Losses on LPG have swelled to Rs 353 per 14.2-kg cylinder from Rs 305.90.

The basket of crude oil India buys averaged $124.02 per barrel in the second fortnight of May as against $115.09 in the first fortnight. The Indian basket was at $67 per barrel in February when petrol and diesel price were raised by Rs 2 and Re 1 a litre, respectively.

In the last seven days, the top bosses of these leading oil companies have been forced to announce that if the government does not increase the price of oil in six to seven weeks, they will go bankrupt.

These companies are already grappling with difficulties in opening the Letter of Credit because of the cash crunch.

Air India has lost Rs 2,000 crore (Rs 20 billion), while Jet airways [Get Quote] and Kingfisher will be affected to the tune of Rs 1,000 crore (Rs 10 billion) each, said an expert of the civil aviation industry.

Additional inputs: PTI