Marianne Kearney, Jakarta – Each week, as a Toyota landcruiser roams the streets of Jakarta consuming half a tank or 50 litres of petrol, the Indonesian government is subsiding its relatively wealthy owner about 260,000 rupiah per week (S$50). This is about 60 per cent of a factory worker's salary.

But in its latest Budget, Jakarta has announced deep cuts to one of the world's most generous fuel subsidies and said it would raise fuel prices by 30 per cent.

Critics say the proposed hike is politically risky. The poor and lower-middle classes – most of whom have not seen their incomes recover since the economic crisis – will undoubtedly be furious as the cost of basic goods is pushed up by increased transportation costs.

A government study found that the fuel subsidies were overwhelmingly benefiting wealthy car owners. Comparing petrol pump prices in Indonesia and Singapore, 80 per cent of petrol costs are subsidised by the Indonesian government, which equates to around 14 million rupiah per year for a landcruiser owner.

International creditors such as the IMF yesterday praised the fuel subsidy cuts.They said the government is curtailing its generous subsidies for the middle and upper classes, and reigning in its budget blowout to within 2.5 per cent of GDP, from 3.7 per cent of GDP this year.

But fuel price hikes in the past have not gone down well with the lower and middle classes. In June, when the government raised fuel prices by 30 per cent, electricity costs by 20 per cent and kerosene prices by 10 per cent, the cost of staple foods rose by 20 to 30 per cent and several cities were paralysed by violent protests. Fuel price hikes in 1998 also led to massive demonstrations and the eventual downfall of then president Suharto.

But economists said the fuel price rise this time round would not have such a dramatic impact on the cost of staple foods. "In the short term, the price of goods will increase but the rupiah can play an important role in reducing the impact. If it strengthens to 8,500 rupiah to the US dollar, then staple goods will not increase too much," said Johannes Salim from HSBC securities.

He attributed the June price increases to the weakness of the rupiah, which has stabilised since Ms Megawati Sukarnoputri was elected President. Mr Johannes said the poor and lower classes would be worst hit by an increase in the cost of kerosene, used by the poor as a cooking fuel.

The proposed fuel price hikes, which would include a 30-per-cent hike in petrol, a 6-per-cent hike in electricity and around 10-per-cent hike in kerosene, would probably take effect next January, said chief economic minister Dorodjatun Kuntjoro-Jakti.

Analysts said some political parties such as the Muslim Central Axis might use the sensitive issue to score some political points. However, they felt that Parliament would probably back the move as there was little other way of containing the Budget.