A recalibration of fuel prices in India was inevitable due to the war in West Asia and the resultant crude crunch. The choking of the Hormuz Strait added a sense of urgency, pushing the government to slash the special excise duty on petrol and diesel by Rs 10 per litre, reducing it to Rs 3 on petrol and zero on diesel.
International crude prices have moved up to $116 per barrel, and global fuel prices have spiked by 30-50%. The government's move was imperative because Indian oil marketing companies (OMCs) were under serious margin pressure - they have been incurring losses of around Rs 24 for petrol and Rs 30 for diesel, per litre, at current market prices.
The cut in the excise duty will partially help to offset the OMCs' under-recovery. They are unlikely to pass the benefit on to the consumers because the cut does not fully compensate for their losses. The burden has now shifted to the government. Excise earnings from the petroleum sector account for a significant share of government revenues at the Centre and in the states. The sector's total contribution to the exchequer, including taxes, dividends, and royalties, in 2024-25 was Rs 7.4 lakh crore - Rs 4.15 lakh crore for the central government and Rs 3.25 lakh crore for the states. The net revenue loss from the current crunch is loosely estimated at over Rs 1 lakh crore. There is no certainty of this being the last reduction in duties. Earnings in 2026-27 from special additional excise duties on petrol and high-speed diesel were projected at Rs 1.69 lakh crore. The revenue shortfall, even based on present estimates, will be substantial and can adversely affect budgetary calculations.
The course of the war remains uncertain, raising fears of further disruptions in crude movement and a heightened supply crunch. These escalations can drive crude prices higher, forcing more rounds of price adjustments. The government has also imposed an export tax on diesel, as part of efforts to disincentivise exports, and to ensure that the domestic demand is met. Being heavily dependent on imports, India has few options for managing fuel prices. Some countries have already started rationing and brought in changes in work schedules. The government has denied any plan for rationing. Retail prices have been kept unchanged in view of the Assembly elections in four states and a Union Territory. Pump prices are likely to see a rise after the polls.