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Informist, Sunday, May 3, 2026

NEW DELHI – The government should move towards a gradual pass-through of the international fuel prices to retail prices to relieve some of the burden on the Budget and reduce fiscal costs, the Indian Council for Research on International Economic Relations said in a report. "A gradual and well-communicated move toward greater pass-through of international prices, combined with targeted support for vulnerable households, particularly those reliant on liquefied petroleum gas, would help reduce fiscal risks while preserving social protection," the report authored by Sanjeev Gupta and Pratik Tiwary said.

India has shielded consumers and producers from higher international fuel prices in the wake of the war in West Asia by keeping retail prices of petrol, diesel and LPG broadly unchanged. "While this approach has provided short-term relief, it has shifted the burden onto the Budget, weakened price signals, and heightened macroeconomic vulnerabilities, particularly through pressures on fiscal and external balances," the report said.

India faces one of the worst energy crises in decades due to the war in West Asia. It has been exposed to energy supply and price shocks, given its dependence on countries in the Persian Gulf region for crude oil, liquefied petroleum gas, and liquefied natural gas supplies. Crude oil prices have surged to as high as $126 per barrel from $73 per barrel before the war.

The think tank said that continuing the current fuel-pricing policy would result in significant fiscal costs, especially if elevated oil prices persist due to prolonged supply disruptions even after the conflict subsides, thereby adding to public debt. This may pose a risk to the government's plan to cut its debt-to-GDP ratio to 50% by 2030-31 (Apr-Mar). "Over time, this would crowd out priority spending while disproportionately benefiting higher-income households. At the same time, suppressed prices weaken incentives for energy efficiency and complicate the transition to cleaner energy," the report said.

The government has taken a slew of measures to mitigate the impact of the war in West Asia, including cutting excise duty on diesel and petrol by INR 10 per litre to help oil marketing companies absorb the rise in crude oil prices. It has also introduced a special additional excise duty on exports of petrol, diesel and aviation turbine fuel with effect to ensure domestic availability of petroleum products by disincentivising exports.

On Saturday, the government's Chief Economic Adviser V. Anantha Nageswaran said that the conflict in West Asia is likely to put pressure on the government's finances and make it difficult to meet the fiscal deficit target for FY27 due to higher fertiliser and fuel costs.

The report said the petroleum taxation framework also needs to be revisited to prevent erosion of the tax base and better reflect the social costs of consumption. "In this regard, bringing petroleum products into the goods and services tax framework could help," the report said.

"The current crisis further underscores the need to accelerate structural reforms to reduce dependence on imported oil, expand petroleum reserves, and diversify energy sources. Without such reforms, India will remain highly exposed to future energy shocks, with rising fiscal and external risks," the report said.  End

US$1 = INR 94.91

Reported by Sagar Sen

Edited by Saji George Titus

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