The fuel price hike is not enough to help oil marketing companies | Photo Credit: Fahad Puthawala

The ₹3 per litre increase in prices of petrol and diesel announced by the Centre on Friday is neither here nor there. The move clearly reflects the predicament that the Centre finds itself in now. It has to be mindful of the inflation monster as fuel prices have a cascading effect across the economy. But leaving oil marketing companies, rich as they are, to shoulder the burden indefinitely is not an option either.

The increase is too small to meaningfully ease the burden on the oil marketing companies, which have been absorbing the crude oil price shock for two-and-a- half months now. Pricing economics would demand an increase of at least three to four times of what has been done now. But an increase in retail price of that proportion would be disastrous not just from the inflation viewpoint, but also politically for the ruling coalition. Even this small increase is projected to push up inflation by up to 25 basis points. Inflation in April was already at a 14-month high of 3.48 per cent and the May number will bear close watching. Policymakers are obviously wary of provoking the Reserve Bank of India (RBI) — a reversal of the interest rate cycle and increase in policy rates at this point in time would be extremely unwelcome from the government’s point of view. This probably explains the small increase now.

The oil marketing companies — Indian Oil, Bharat Petroleum and Hindustan Petroleum — will continue to bear a disproportionate share of the price shock. Though they are cash-rich, the extent of the price shock is such that even their balance sheets will be put under strain, which is not good. India’s crude basket price has shot up from $69 a barrel in February to $106 a barrel now. This is a rise that cannot be wholly borne by just one of the three stakeholders —government, oil companies and consumer. For its part, the Centre cut excise duty on petrol and diesel in March by ₹10 per litre each — duty on petrol is now down to ₹11.90 a litre and for diesel it is ₹17.80 a litre. It is impractical to expect another cut in central duties from these levels. Tax revenues are set to come under tremendous stress as economic activity is set to slow down, if it is not already doing so. Industry is grappling with both price and supply shocks and an increase in product prices will eat away a large part of the discretionary spending of the consumer. This is tragic because after the income tax and GST rate cuts last year, consumers were actually beginning to open their purses.

The Centre’s gameplan on fuel prices seems to be to one of ‘wait and watch’, and calibrate price increases over a period of time, if warranted. That’s not bad strategy as the full shock can be postponed and regulated over a period of time as opposed to a sudden one. Yet, one cannot help but point out that had fuel pricing been free, the Centre would not have found itself in a spot now. Regular price increases in small instalments would have regulated the shock and also sent a signal to consumers to rein in fuel consumption. There’s a lesson here for the future.

Published on May 15, 2026