Oil Secretary Vivek Rae said the issue of a one-time hike in diesel and cooking fuel rates "is a political and economic challenge" from which "we cannot run away".
"Some burden has to be borne by the consuming population. That is the challenge the government faces. It is a political challenge, it is an economic challenge. It is a challenge we cannot run away from," he said at a conference.
Mr. Rae said the subsidy burden has reached unsustainable levels that cannot be financed by the government budget and oil companies.
Oil subsidy, he said, had risen by Rs. 20,000 crore in the last two months alone on the depreciating rupee that made imports costlier.
With limited financial resources, the government cannot run the risk of inflating the fiscal deficit further as it would lead to further depreciation in the rupee and downgrade in credit ratings, he said.
Later talking to reporters, he said a decision on raising rates beyond the 50 paise a litre increases being effected currently would be taken after considering all options.
"Finance Minister (P. Chidambaram) himself has said that the decision has to be considered very carefully. So I guess all aspects will be taken into consideration before deciding what to do next. There are many options available," he said without elaborating.
Officials said the softening in international oil rates and the appreciating rupee will translate into a cut in petrol price on September 15-16.