June 4 (Bloomberg) -- India's government raised retail fuel prices and reduced taxes to narrow more than $50 billion of revenue losses at refiners, risking fanning inflation that's at a 3 1/2 year high.

Gasoline prices will rise 11 percent to 50.56 rupees ($1.2) a liter in New Delhi, exceeding the average U.S. price of $3.94 per gallon. The price of diesel will be raised by 9 percent and cooking gas by 17 percent from midnight, Oil Minister Murli Deora told reporters in the capital. Shares of state-run refiners declined after initial gains.

Prime Minister Manmohan Singh's government joins Indonesia and Sri Lanka in raising fuel prices after crude oil almost doubled in a year. Malaysia said today fuel will be sold at market rates to cut subsidies. India's price increases and tax cuts will reduce refiners' losses by about $10 billion, less than a fifth of the shortfall this year.

``The prices should have been raised higher for a real impact,'' said Ballabh Modani, Mumbai-based analyst with Enam Securities Pvt., who is ``underweight'' on the shares of all state-run refiners. ``There's no point in ad hoc increases, the government needs to put in place an independent system for prices.''

India caps retail fuel prices to control inflation. Today's price increases may add between 0.5 and 0.6 percentage point to wholesale prices, Oil Secretary M.S. Srinivasan said. Oil prices reached a record $135.09 a barrel in New York on May 22, driven partly by speculation fuel subsidies in Asia will spur demand.

Price Rises

Gasoline prices will be raised by 5 rupees a liter and diesel by 3 rupees, the minister said. Liquefied petroleum gas will be increased by 50 rupees for a 14.2 kilogram bottle.

Customs duties on gasoline and diesel were cut to 2.5 percent from 7.5 percent and on other oil products to 5 percent from 10 percent. Excise duty on auto fuels was reduced by 1 rupee a liter. Import duty on crude oil was scrapped from 5 percent.

India's communist parties, which give Singh's ruling coalition a majority in parliament, asked the government to review the price increases and said they would protest by demonstrations, strikes and blocking road and rail routes.

``This onslaught on the people comes at a time when they are suffering from a steep rise of all essential commodities,'' the communists said. The fuel price increases will ``further aggravate the inflationary situation.''

The prime minister is likely to address the nation at 8:30 p.m., the government's spokeswoman Deepak Sandhu said.

Refiners Decline

Bharat Petroleum Corp., India's second-biggest state refiner, declined 8.4 percent to 322.3 rupees in Mumbai, the biggest fall in four years.

Indian Oil Corp., the nation's biggest refiner, fell 3.7 percent, the most in three weeks, to 417.85 rupees. Indian Oil posted its first quarterly loss in more than two years on May 28 after subsidies failed to offset costs.

Hindustan Petroleum Corp. dropped 2.6 percent to 241.05 rupees.

``The only long-term sustainable measure is raising prices,'' B. Mukherjee, director of finance, Hindustan Petroleum, said in a television interview with Bloomberg before the measures were announced.

The government previously increased fuel prices in February, the first time since June 2006. Cooking gas prices had been capped since April 2005.

Oil Imports

India, Asia's third-biggest economy, imports 70 percent of its oil requirement and is seeking ways to soften the impact of the surge in prices. Singh said this week that subsidies can't be allowed to rise any further because petroleum prices don't reflect world trends.

The nation's central bank announced steps in the past week to ease the financial burden of state oil companies. The Reserve Bank of India said oil companies can invest more than 400 percent of their net worth in exploration of oil, gas and mining coal overseas.

The limit on bank loans for state-run oil refiners was increased to help them meet expenses. The central bank also said it will provide foreign currency to refiners against so-called oil bonds to help them meet the rising cost of crude oil.

The price increase will reduce refiners' losses by 211.2 billion rupees and the duty cuts will cut their shortfall by 210 billion rupees, secretary Srinivasan said.

Malaysia, Indonesia

Malaysia joined neighbor Indonesia in raising fuel prices. The price of 97-RON grade gasoline will increase 41 percent to 2.70 ringgit (83 cents) a liter from 1.92 ringgit, effective tomorrow, Prime Minister Abdullah Ahmad Badawi said. The price will be adjusted monthly, he said.

Indonesia raised fuel prices by an average of around 29 percent on May 24, the first increase in three years, to cut subsidy costs.

Ceylon Petroleum Corp., Sri Lanka's state oil company, increased fuel prices for the second time this year on May 25 to trim losses caused by record crude costs. Lanka IOC Ltd., the Sri Lankan unit of Indian Oil, raised diesel prices three times and gasoline prices once this year.

Part of the loss incurred by Indian refiners is compensated by the government, which gives them bonds and asks Oil & Natural Gas Corp. and other state-run explorers to share the subsidy.

Oil refiners will still lose about 290 billion rupees in the fiscal year after the price increases and oil bonds, Revenue Secretary P.V. Bhide said today.

Shares of Tata Motors Ltd., India's biggest truckmaker, Hero Honda Motors Ltd., the nation's largest motorcycle maker, and others declined in Mumbai after the fuel price increase.

Tata Motors fell 5.2 percent to 541.05 rupees, Hero Honda declined 2.7 percent to 777 rupees and Maruti Suzuki India Ltd. dropped 4.6 percent to 746.55 rupees.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.

Last Updated: June 4, 2008 07:59 EDT