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Oil Minister Veerappa Moily sparked the speculation Sunday when he told a local news agency that "shutting petrol pumps during (the) night" was one of several austerity measures being assessed to cut the imports bill.
News of the proposal, a throwback to India's pre-liberalisation past when the government tightly regulated all parts of the economy, sparked feverish debate on television and Twitter.
It also apparently took the rest of the cabinet by surprise, leading to a formal denial issued via the information ministry.
"The ministry of petroleum and natural gas has clarified that there is no proposal under consideration of the government to allow sale of petroleum products from the retail outlets only during certain hours," said a statement.
The main opposition Bharatiya Janata Party (BJP) made fun of the plan.
"Won't the people fill their car fuel tanks in the morning? This is a strange move by Moily," BJP spokesman Shahnawaz Hussain said.
India imports around 80 percent of its oil needs and its import bill has risen dramatically because of high global prices and a plunging rupee, which has hit record lows in recent weeks.
The country is struggling to shrink its current account deficit -- the broadest measure of trade -- which hit a record 4.8% of GDP last year and is straining foreign exchange reserves.
In afternoon trade, the rupee was down to 65.88 rupees to the dollar from Friday's 65.70, snapping a two-day rally. The Bombay Stock Exchange's benchmark Sensex was up 1.51% at 18 900 points on investor bargain-hunting.
In another proposed measure, New Delhi is also mulling increasing oil supplies from sanctions-hit Iran, which could save India $8.5bn in foreign exchange reserves, local newspapers reported Monday.
Moily has written to Prime Minister Manmohan Singh spelling out the strategy with Iran, which accepts payment in rupees rather than dollars, The Economic Times reported.
"About 2 million tonnes (of) crude oil has been imported from Iran so far during the current financial year," Moily wrote, according to the paper.
"An additional import of 11 million tonnes during 2013-14 would result in reduction in forex outflow by $8.47bn."
The government has launched a series of measures in recent weeks to try and plug the deficit amid a faltering economy and fears of a downgrade by ratings agencies.
The government has three times this year raised import duties on gold, the second biggest contributor after oil to the deficit.
On Sunday state-run Indian Oil Corp increased petrol prices by more than 3.5%, blaming the falling rupee.
The government has partially deregulated petrol and raised diesel prices to try to reduce the massive subsidies it pays to state-run fuel refiners.
