Petrol and diesel prices increased by Rs 3 last week, adding pressure to monthly budgets. The ongoing Middle East conflict has pushed global fuel prices higher, tightening energy supplies. In India, the government raised fuel prices for the first time in four years, a move expected to push inflation higher. But beyond household budgets, how will this fuel hike impact India's economy?
No Direct Fiscal Impact
According to SBI Research Ecowrap, the immediate consumer price inflation shows an upward movement, but there is no direct impact of this hike on the fiscal situation. The report notes that fuel consumption levels typically recover quickly after an initial price change. Historical data indicates that a hike in petrol and diesel prices is followed by a decline in consumption immediately after, only to recover thereafter, with no decline visible in annual consumption levels. The immediate impact on CPI inflation is estimated at around 15-20 basis points in May-June 2026. Consequently, SBI Research revises its FY27 inflation forecast to 4.7%. The report emphasizes that there is no direct impact of this hike on the fiscal situation.
OMCs Under Pressure
Behind the price adjustment lies a deeper strain on oil marketing companies (OMCs). Under-recoveries on the sales of petrol and diesel are rising because retail prices remained unchanged for a long period. According to the Union Minister, OMCs are incurring losses of about Rs 1,000 crore per day, which amounts to approximately Rs 3.6 lakh crore annually. The current increase in oil price by Rs 3 provides relief of Rs 52,700 crore in under-recoveries, covering 15% of the expected total loss of OMCs in financial year 2027.
The SBI report also outlines wider fiscal implications if the government were to change the current tax structure on fuel. If the government reduced excise duty on petrol and diesel to zero from current levels of 11.9% and 7.8% respectively, it would lead to a reduction in government revenue or gain for OMCs of around Rs 1.9 lakh crore. This could increase the fiscal deficit by 0.5% of GDP if the government does not reduce expenditure. The overall loss from an excise duty cut in the current fiscal, including the net loss from the Rs 10 duty cut in March, amounts to Rs 3 lakh crore. Currently, 15% of the OMC loss is covered by the Rs 3 retail price increase, and 53% would be covered by reducing excise duty to nil.
The report adds that if the Centre's excise duty is reduced to nil, it also impacts state government revenue collections. Estimates suggest states would lose Rs 0.8 lakh crore if the Centre's excise duty is reduced to nil, keeping all else the same. However, higher oil prices would benefit states by around Rs 30,000 crore, so the net impact on state revenue would be Rs 50,000 crore.
