With Brent crude hovering around $100–102 per barrel, India’s fuel pricing system is under acute strain, with oil marketing companies (OMCs) absorbing annualised losses of nearly ₹3 trillion, while retail fuel prices would need to rise by as much as 43% for diesel and 19% for petrol to restore normal margins.
The sharp divergence between global crude costs and largely frozen domestic pump prices has pushed the first leg of the oil shock squarely onto OMC balance sheets, exposing the growing stress within India’s fuel pricing framework.
What do researchers say?
“Our estimates suggest that at current Brent prices (@$100/bbl), retail pump prices of diesel and petrol need to rise by 42% and 18%, respectively, for OMCs to earn normalized gross marketing margins,” an Emkay Research report said.
At brent crude around $100 per barrel, the report estimates that annualised under-recoveries on auto fuels are as high as ₹4.4 trillion, easing to about ₹3 trillion after accounting for super-normal refining margins.
The burden extends beyond transport fuels. Losses on cooking fuels are also rising, with annualised LPG under-recoveries estimated at nearly ₹700 billion, even after accounting for subsidies.
Amplified pressure: Understanding the structure of fuel pricing
The stress is amplified by the structure of fuel pricing. Around 35–39% of retail petrol and diesel prices comprise central excise, cess and state VAT, with the Centre’s share alone close to 20%, limiting flexibility to absorb shocks without fiscal consequences.
With pump prices largely unchanged, OMCs are effectively cushioning consumers. The report notes that marketing margins have compressed to their lowest levels since mid-2022, reflecting the extent of cost absorption.
The sensitivity to crude prices is significant. For every $1 per barrel increase in Brent, retail prices would need to rise by about ₹0.52 per litre for diesel and ₹0.55 per litre for petrol, indicating how quickly losses escalate when prices are not passed through.
“The eventual growth, inflation, and fiscal hit will largely depend on how the crude price shock — if sustained — is distributed between OMCs, the government, and end consumers,” the report said, highlighting the core policy dilemma.
If the government chooses to fully absorb OMC losses, the fiscal cost could be substantial. The report estimates that the Centre may need to cut excise duties by around ₹19.5 per litre on a blended basis and absorb LPG subsidies of about ₹1 trillion, resulting in a fiscal impact of nearly 1.0–1.1% of GDP.
Even a partial burden-sharing approach would not eliminate fiscal pressure. The report notes that OMC losses indirectly hit government finances by reducing dividend and corporate tax flows, effectively shifting part of the burden to the exchequer.
It suggests that a balanced pass-through among OMCs, government and consumers is the most feasible scenario in a prolonged oil shock. Under such a model, OMC losses could fall to about ₹1.3 trillion, inflation impact may remain contained at 30–35 basis points, and fiscal slippage could still be around 0.4–0.5% of GDP.
India’s vulnerability is heightened by its heavy import dependence, with nearly 90% of crude requirements sourced externally, making the economy highly sensitive to global oil volatility and geopolitical disruptions.