After a lot of going round in circles trying to get an honest answer from the HCI about this new fee, I managed to meet the minister responsible for consular services at the HCI today.
He suggested that the fee of Â£90 (actually Rs 7000) for renunciation of Indian citizenship has been there for a long time and set by the Home Ministry in India. Its just that they have started to enforce the passport surrender and the fee strictly now because there were issues with people continuing to use Indian passports even after obtaining foreign nationality.
The fee of Â£90 is advertised on the Home Ministry's website at http://www.mha.nic.in/uniquepage.asp?ID_PK=77
(See entry at No 5.)
I had to dig it out myself as its not publicised anywhere. The minister did agree that the implementation recently has not been smooth as they did not foresee the huge impact it may cause.
In any case, I've now paid the fee myself to obtain a surrender certificate as I am satisfied that the fees is not something that is applied unilaterally by the HCI London.
I do still feel that the fee and the penalty regime (penalty of 10000 Rs for each trip made on Indian passport after obtaining foreign nationality) is a bit harsh and should have been enforced after some though thought and planning.