Indonesia's government jacked up fuel prices on Saturday, sparking protests, but some $1.5 billion of cash handouts intended to cushion the blow for poor families could turn out to be a savvy move, politically and economically.

With parliamentary and presidential elections due next year, the issue of fuel subsidies has proved a tricky one for the government because of the risk of widespread social unrest if fuel and food prices rise sharply.

Soaring global oil prices have forced Indonesia to spend billions of dollars on fuel subsidies, which the government said mainly benefit the wealthy rather than the poor -- and at the expense of spending on health, education, and infrastructure.

A cash handout scheme, which came into effect on Saturday in several big cities, is intended to pass on some of the savings on fuel subsidies to about 19 million poor families, to help offset the rise in fuel and food prices.

"It will cushion the poor," said Fauzi Ichsan, an economist at Standard Chartered Bank.

Political parties that criticise the cash handouts risk appearing anti-poor in a country where millions live on less than $2 a day, some analysts said.

Indonesia is not alone in being forced into a corner by record crude oil prices. Taiwan said it was abolishing price controls on petrol and diesel, while India and Malaysia are also poised to take action.

Malaysia's top committee on inflation will review the country's mounting fuel subsidies at a meeting on May 27, state Bernama news agency said on Saturday, quoting Deputy Prime Minister Najib Razak.

But strong demand from China, which is resisting lifting retail prices, means that global oil prices are likely to remain high.

BASIC NEEDS

While the Indonesian government had signalled its plan to raise fuel prices for several weeks in response to soaring global oil prices, many ordinary Indonesians are struggling to cope with the steady rise in the cost of basic goods.

It's not just higher fuel prices that are a worry for Indonesia's fast-growing population of motorbike and car owners. The cost of soybeans, wheat, cooking oil, and other daily necessities has soared, hurting many poor and middle-income households.

Inflation hit a 19-month high of 8.96 percent in April, and the fuel price hike is expected to push it above 12 percent this year.

Earlier this month, the central bank raised its key interest rate to 8.25 percent, the first increase since December 2005, and further tightening is likely, which could slow economic growth.

"All basic needs are expensive. We are not able to protest against it, and even if we were to protest, the price will still increase," said Saeni, 63, as she and her husband collected 300,000 rupiah ($32), or three months' worth of cash handouts, at a post office in Jakarta on Saturday.

"A hundred thousand rupiah is meaningless. Even for eating, it will not be enough."

Indonesians have been out on the streets in recent weeks in protest at the plans to raise fuel prices, which even after the average 28.7 percent increase are still among the lowest in Asia.

Several protests took place on Saturday, in Jakarta and other parts of the country. About 100 students in Surabaya, Indonesia's second-biggest city, clashed with police and at least four students were wounded, Metro TV reported.

A senior police official said about 175 people were arrested in Jakarta on Friday night after the government's announcement prompted protests.

Long queues had formed at petrol stations on Friday as motorists tried to fill up ahead of the announcement, and local media have reported several instances of fuel hoarding and smuggling in recent weeks.

Police officers guarded post offices, as well as petrol stations on Saturday, to maintain calm.

Wawang, 38, a motorbike taxi driver in Jakarta, said that the rise would directly affect his ability to make a living.

"The increasing of fuel prices is difficult for us as motorbike-taxi drivers because if we raise our price, then our customers maybe will not use our services and change to use buses, for example. But if we don't increase the price, we are going to get less income."

($1=9308 Rupiah)