The coalition backing Indonesian president Susilo Bambang Yudhoyono is looking increasingly shaky after key partners defied the government to defeat a proposal to limit government spending on subsidised fuel.

The decision by the Golkar Party and the Prosperous Justice Party (PKS) to deny its support for the policy late last week, thereby sinking it on the floor of the House of Representatives, followed a week of nationwide protests against the subsidy cut that occasionally turned violent and carried echoes of the 1998 demonstrations, also in part on fuel prices, that led to the ousting of strongman president Suharto.

Yudhoyono, seemingly spooked by the vehemence of the protests and the rebellion of a supposed coalition ally, cancelled his visit to Phnom Penh for an Association of Southeast Asian Nations summit, scheduled for Tuesday and Wednesday.

The failure to proceed with the policy, which had been welcomed by economists and international organisations but had little popular support, deals a blow to hopes that Yudhoyono would use his final two years in office to deliver the structural reforms that often carry short-term political pain but are necessary for the country’s long-term development.

Yudhonoyo was directly elected and so can only be removed from office by impeachment, for which there do not seem to be grounds at this point. But he and his Democratic Party have prided themselves on being the leader of a six-party coalition, an arrangement that has up to this point helped ease the passage of legislation through the national parliament. The weakening of the coalition therefore hampers his ability to get his way with the legislature, but perhaps more significantly challenges the authority of his presidency.

In many ways, the government’s failure on the fuel price issue is a product of an underwhelming effort to sell the policy to the public rather than inherent flaws in the policy itself.

What the government proposed was a sensible response to the rising global oil price. At present, the price of low-octane fuel is fixed at 4500 rupiah (about 47 Australian cents) per litre, with state subsidies covering the gap between that price and the global oil price, said to equate to about 8000 rupiah a litre.

The policy was having a crippling effect on state finances, with the cost of the subsidy ballooning as the oil price rose, threatening to substantially increase the size of the government deficit given 9% of the $161 billion national budget is spent on fuel subsidies. It also meant that Indonesian consumers were shielded from the rising cost of fuel, and so had little incentive to develop or utilise more fuel-efficient means of transport.

The government proposed from April 1 to increase the price to 6000 rupiah per litre, a price that would still leave Indonesians with some of the cheapest fuel in the world but would curb runaway state subsidy spending.

Acknowledging the impact the policy would have on the poor, for whom fuel spending constitutes a significant part of their spending, the government had planned for short-term adjustment spending, in which about two-thirds of the savings — $A4.2 billion of the $A6 billion total saving in 2012 —  would be returned to the poor in the form of targeted cash handouts.

No price rise is an easy sell, but the government’s botching of the effort was spectacular. The sales effort was minimal. Yudhoyono and his ministers rarely spoke about the policy or explained it to the public, instead relying on the president’s personal popularity to reassure people that it was necessary despite the pain. When the public mood proved unfavourable, the government attempted a series of ham-fisted distractions, hoping to change the topic of debate: a new task force headed by the Religious Affairs Minister to enforce the 2009 anti-p-rnography law and a new law to limit the positions foreigners could hold in Indonesian companies among them.

It’s not as if there were a shortage of arguments the government could draw upon in selling its policy. The Asian Development Bank pointed out that the existing subsidy is a boon for the rich, with the wealthiest 10% of people (mostly in private cars) using 40% of the subsidised fuel. The ballooning deficit also forces the government to borrow funds, and pay the interest that comes with it. And with the global price of oil on the rise, people the world over are paying more at the pump, and Indonesia’s own modest production aside, there’s no good reason for the country to exempt itself.

(It is ironic that one of the best defences of the policy came from a Yudhoyono staffer in this opinion piece — but the biography at the end explicitly stated that the views expressed were merely the author’s own.)

The policy, and the government’s silence, touched a raw nerve with the public. Streets of big cities across the country filled with protests led by student and worker organisations to block the price rise, citing the impact on the poor (despite the rich being the biggest beneficiaries). Major roads were blocked. Bad street theatre was performed. And police and military occasionally exchanged petty violence with protesters, despite novel attempts to keep the peace through measures like using maternal-minded female police officers.

(It’s worth noting that street protests in Indonesia are often far from organic. Organisations keen to claim grassroots support for their cause are not afraid to offer “transport money” to encourage attendance at a demonstration.)

Pretty swiftly, the three parties in the parliament not in the government announced their opposition, among them former president Megawati Sukarnoputri’s Indonesian Democratic Party of Struggle (PDI-P). Members of the governing coalition expressed support through gritted teeth, with some suggesting alternative ways to spend the savings, such as on the development of infrastructure. Yudhoyono even muttered about dark forces at work keen to use the fuel price issue to undermine his government and bring it down. Such speculation kept the coalition members in line publicly, but left them to privately express their displeasure.Finally the issue came to a head last week, just days before the policy was scheduled to come into force. Early in the week, governing coalition member the PKS rejected the plan, and then on Thursday night, Golkar announced it would not be supporting the price rise, depriving the government of the numbers it needed to pass it through the House.

Friday was spent trying to put together a face-saving compromise, but the damage was done. After a day of negotiations, at a rowdy session of the House — complete with shouting amid debate, a walkout by some parties and a brawl in the public gallery — a deal won the support of lawmakers. Under it, the price of fuel can only increase should the Indonesian Crude Price, closely linked to the global oil price, exceed the $105-a-barrel price expected in the budget by 15% in average over the previous six months.

It’s a deal, but not one the government’s too happy with. On those parameters, a price rise is most unlikely in the next few months, and the budget deficit looks set to sail beyond 3% of gross domestic product. And even the compromise legislation is facing a legal challenge from opponents who argue it is unconstitutional.

Yudhoyono, trying to put the best spin on things, addressed the nation on Saturday. “My view is that an increase in the subsidised fuel price will be a last resort if there is no better way,” he said.

What it means for the remainder of Yudhoyono’s presidency will be interesting to watch. The position of Golkar and PKS in the government looks increasingly untenable given the snubs they delivered to the president. Perhaps the biggest winner is storied businessman Aburizal Bakrie, who as Golkar’s candidate for president in 2014 has just been given the perfect opportunity to position himself as the champion of the people. Plus, like every other billionaire in Indonesia, he’ll still get access to heavily subsidised fuel.