India has become the latest Asian government to admit defeat in its battle to shield its population from rising oil prices, a move that economists say could derail economic growth across the region, stoke inflation and influence upcoming general elections.

The Indian Government raised petrol prices by 11 per cent to stem massive losses suffered by the country's state-owned petrol companies, running at an estimated £50 million a day. Diesel was raised by 9 per cent and cooking gas by 17 per cent.

Caps on petrol prices have already crumbled in countries including Indonesia – which increased fuel prices by nearly a third last month – Taiwan, Pakistan and Sri Lanka. China, meanwhile, is considering lifting the oil-price threshold at which oil companies pay windfall taxes, a move that could lift pressure on the prices consumers pay for fuel.

Malaysia also relaxed its fuel cost controls yesterday, to allow forecourt prices to track the world oil markets.

Oil fell below $123 a barrel on Wednesday – its lowest level in nearly three weeks – on the back of strong US inventory figures and the expectation that Asian fuel price rises will curb demand.

India's price rises will increase the pressure on the country's ruling coalition, led by the Congress Party, which has already suffered a series of local election defeats ahead of a general election that must be held before May.

Manmohan Singh, the Indian Prime Minister, said in a televised address to the nation that the latest move was inevitable. "Our oil companies cannot go on incurring losses. This way they will have no money to import crude oil from abroad," he said.

Economists at Lehman Brothers said higher petrol costs would help lift India's wholesale rate of inflation to 8.5 per cent, a 13-year high, and well above policy makers' 5 per cent comfort threshold.

Sonal Varma, a Lehman economist, said: "Higher fuel prices are negative for economic growth, weakening consumer demand, squeezing producer margins and increasing overall costs."

The main opposition Bharatiya Janata Party (BJP) said the fuel price rises made Mr Singh's position untenable. A spokesman for the BJP said: "If fuel price increases are inevitable, then the exit of the Prime Minister and his Government is inevitable as well."

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