The first in the series of moves to revive the economy has come through. On Friday, the government slashed domestic prices of petrol and diesel by Rs 5 and Rs 2 a litre, respectively, but left that of cooking gas (LPG) untouched.

Petroleum minister Murli Deora said this was an interim measure, but did not spell out if it would be followed up with further price reductions. The cuts are expected to help dampen the inflation rate, which has fallen to 8.4% from a high of 13% in July. Transporters and logistics companies told FE that the cut in diesel prices is not enough for them to lower freight rates immediately.

The decision to cut fuel prices was taken at a Cabinet meeting chaired by Prime Minister Manmohan Singh. With effect from midnight on Friday, the new price of petrol (in Delhi) will be Rs 45.62 a litre, while diesel would cost Rs 32.86 a litre. The price of US light crude?the international benchmark?for January stood at $43.67 a barrel, a four-year low, down from $147 a barrel in July 2008. The Indian basket of crude oil was also at an all-time low of $40 a barrel on Friday.

In June, the government had raised the price of petrol and diesel by Rs 5 and Rs 3 a litre, respectively, and that of LPG by Rs 50 a cylinder, to protect oil marketing firms against losses on account of the massive spike in crude prices. Friday?s cut in fuel prices comes after a gap of nearly two years; the last cut was in February 2007.

According to a senior oil ministry official, India?s fuel pricing system was up for complete overhaul and the petroleum ministry has prepared a detailed note listing details of the revised pricing mechanism. The official said the new mechanism would be placed shortly before the Cabinet. Petroleum ministry officials said lower fuel prices would provide a ?feel good? factor in the economy, battered by a sudden downturn since September 2008. The move comes just a day ahead of a government fiscal stimulus package, scheduled to be announced on Saturday.

However, they said as a result of the fuel price cuts, IOC, HPCL and BPCL would see pressure on their finances, which had improved with crude oil prices falling by over 65%. ?Even at current crude prices, under-recoveries of the oil companies are estimated to be above Rs 1 lakh crore,? an official said, adding they were still losing Rs 18 a litre of kerosene sales and Rs 140 on each LPG cylinder. The companies are currently making a profit of around Rs 14 on every litre of petrol sold and around Rs 3 on every litre of diesel.