Economics of energy: India needs transparent pricing and a fiscal strategy

Following the agreement between the United States (US) and Iran, global prices of crude oil have corrected to the levels seen before the conflict began on February 28. The benchmark Brent crude price has fallen to about $72 per barrel from its April high of about $120 per barrel. The sharper than expected decline offers much-needed relief for India, which depends on imports for the bulk of its crude-oil consumption. However, it has been indicated that pump prices may not come down immediately. It is worth noting that the increase in retail prices of petroleum products was limited in India because state-run oil-marketing companies (OMCs) refrained from raising prices. Cumulatively, starting May 15, OMCs only raised the price of petrol by ₹7.38 per litre and diesel by ₹7.52 per litre. The government had earlier reduced special excise duty on petrol and diesel to keep prices stable, which is expected to reduce revenue collection by about ₹1.5 trillion on an annualised basis. 

However, the government’s decision to forgo revenue or prevent OMCs from fully adjusting prices did not solve the underlying problem. The government has said that OMCs have suffered underrecoveries worth ₹2.19 trillion from selling petrol, diesel, and liquefied petroleum gas (LPG) until June 30. Their loss stood at ₹74,781 crore. The OMCs will benefit from lower prices of crude oil once the high-cost inventory is cleared. However, the question is how these underrecoveries will be recouped. There is no reason why commercial public-sector undertakings with private shareholding should be forced to incur losses. So, what can be done? 

One option is to keep the retail prices static and let the OMCs recover their losses or underrecoveries more broadly over time. However, under this option, the very section of the population the government intended to protect from higher prices will bear the cost. The second option is to support OMCs through the Budget, with the Union government paying the difference between the selling price and the cost price. However, this will increase the fiscal deficit and borrowing. Higher government borrowing tends to push up market interest rates, affecting both households and businesses. Besides, borrowing will have to be repaid by taxpayers. Thus, it can be argued that market interference did not achieve much, as has been the case historically. A clearer course of action would have been to allow prices to adjust, as most countries did. Prices would have risen and then come down transparently. In fact, this would have served as a clear signal to economic agents to curb oil consumption or seek alternatives. 

There is another important aspect of the oil economy that warrants attention. India’s dependence on oil imports and its climate commitments require that petroleum consumption is replaced, to the extent possible, by electricity, preferably renewable. In transport, for instance, electric vehicles (EVs) should progressively replace vehicles running on the internal combustion engine. However, the shift in India’s energy mix will also have fiscal implications. Both the Union and state governments depend significantly on revenue from petroleum. In 2025-26, for example, provisional estimates show the petroleum sector, including dividends, contributed over ₹4.75 trillion to the central exchequer. For context, it was about 14 per cent of revenue receipts. Furthermore, taxes on EVs are much lower than on ICE vehicles, which will also affect revenue collection. Thus, it will be important not only to move to a transparent petroleum-pricing regime but also to design a medium-term strategy to facilitate a shift in energy consumption without fiscal strain.