Fuel prices: Some relief | Photo Credit: Manvender Vashist

For a country that imports 85 per cent of its crude oil requirements, it goes without saying that a sharp rise in global prices will impact inflation, growth, fiscal deficit and current account deficit. The stakeholders here are the users (consumers, businesses and agriculturists), the government and the oil marketing firms. They lose out on incomes/revenues and costs/prices. There is an equilibrium of sorts in place between these stakeholders, if global crude oil prices are well below $70 a barrel. This has been cruelly disrupted by the recent spurt in prices from $70 a barrel to over $120, since the Iran war began. As a result, oil companies are losing ₹24 a litre on petrol and ₹30 a litre on diesel, as their costs have shot up, without retail prices changing, eating into their refining and marketing margins. The Centre has protected the consumers and oil companies by virtually scrapping the special additional excise duty — from ₹13 per litre of petrol to ₹3 and from ₹10 to nil in the case of diesel – and taking the hit. Analysts expect a ₹1.55 lakh crore loss to the exchequer or about a 10 basis points rise in the fiscal deficit if the reductions remain in place the whole of FY27.

To be sure, the consumer needs protection from inflation to keep domestic demand going at a time when growth will take a hit on the net exports side. There can be no escaping a pass-through of inflation through other commodities on account of price and exchange rate shock. Both the Centre and States have future rising expenses to contend with (on account of fertilizer subsidy and other relief measures in the event of the war dragging on), and cannot be expected to forgo too much excise revenue. An increase in pump prices of fuels looks unavoidable, if the war drags on for, say, another month. Costs will be borne by governments (higher deficits), consumers (higher prices), oil companies (reduced earnings) and businesses in some proportion.

The October 2025 Monetary Policy report of the Reserve Bank of India observes that if crude oil prices rise by 10 per cent “above the baseline” (presumably the stakeholder equilibrium price), and assuming full pass-through to domestic product prices, inflation could turn out to be higher by 30 basis points and growth may be lower by around 15 basis points. If the price rise is absorbed by the Centre, the fiscal deficit will rise. As the Chief Economic Adviser, V Anantha Nageswaran said before the House Panel on Finance, the worries begin if oil prices stay at above $90 a barrel for two or three quarters. At $130 a barrel, the current account deficit can rise to 3.2 per cent of GDP, the fiscal deficit to 5.6 per cent of GDP and inflation to 5.5 per cent; growth may fall 100 basis points to 6.4 per cent. This is a grim situation. The government needs to respond nimbly by securing energy supplies from Russia and Iran. There can be no escaping the price shock, but at least the supply shock can be mitigated. Meanwhile, long term energy security needs attention.

Published on March 30, 2026