FM report says – ‘Petrol and diesel price hikes unavoidable’:How much prices may rise, and how the government has controlled them so far

A report released by the Finance Ministry on April 29 has indicated a possible rise in petrol and diesel prices. It states, “Some countries did not pass the burden of higher oil and other costs on to consumers, but it cannot be avoided.” Earlier, several reports and opposition leaders had claimed that fuel prices could rise after the West Bengal elections concluded on April 29. This comes as global fuel prices increased during the Iran conflict, but India did not raise domestic fuel prices during that period. So, when and by how much could petrol and diesel become costlier? And how has the government managed to keep prices under control so far? We explain in today’s explainer… Are petrol and diesel prices going to rise after the elections? Due to the ongoing Iran conflict over the past two months, global crude oil supply has been affected. As a result, Brent crude prices have risen to as high as $126 per barrel, compared to around $67 per barrel before the US attack on Iran on February 28. Because of this surge, nearly 120 countries around the world have increased petrol and diesel prices. Countries like the United States, China, the United Kingdom and Pakistan have already seen fuel becoming more expensive. However, in India, petrol and diesel prices have remained stable for almost four years, even though the country imports around 40% of its crude oil via the Strait of Hormuz. However, the Ministry of Finance’s Monthly Economic Review report released on April 29 has indicated that a price increase may be possible in the future. The report states that while some countries have already started passing on the burden of rising oil prices to consumers, others have not yet done so, but it cannot be avoided. India is currently receiving crude oil at an average price of around $113 per barrel. It also notes that many oil and gas-importing countries in Asia are under pressure. Countries like Japan and Canada have built strategic oil reserves, which help them absorb shocks. The situation highlights for policymakers the importance of maintaining buffer stocks of essential commodities; otherwise, supply disruptions could lead to even higher energy prices. Earlier, on April 23, brokerage firm Kotak Institutional Equities claimed in a report that fuel prices could increase. It stated that after the April 29 state elections, petrol and diesel prices could rise by around ₹25 to ₹28 per litre. Australia-based multinational brokerage firm Macquarie Group Limited also suggested in its report on India’s oil prices that there is a risk of fuel price hikes at petrol pumps after the April elections. Following Kotak’s report, panic buying reportedly began in Andhra Pradesh on April 27, with people rushing to purchase fuel. Due to nearly 33% higher sales, around 400 petrol pumps in the state ran out of petrol and diesel. On April 28, Rahul Gandhi wrote on X: “After April 29, petrol and diesel will become more expensive. When oil was cheap, the Modi government kept the profit. Now that it is expensive, the burden will be passed on to you.” However, on April 28, Sujata Sharma, Joint Secretary at the Ministry of Petroleum and Natural Gas, dismissed speculation about post-election fuel price hikes. She said, “Sufficient stocks of LPG, petrol and diesel are available in the country and prices are not increasing. So there is no need to panic.” She further added that the government is in continuous coordination with state authorities and priority is being given to strengthening supply to ensure there is no shortage in stock. Meanwhile, due to the ongoing Iran conflict over the past two months, global crude oil supply has been under pressure. Brent crude prices have risen to as high as $126 per barrel, compared to around $67 per barrel before the US attack on Iran on February 28. As a result, nearly 120 countries have increased petrol and diesel prices. Countries including the United States, China, the United Kingdom and Pakistan have already seen fuel prices rise. However, in India, petrol and diesel prices have not increased and have remained largely stable for almost four years. India continues to import around 40% of its crude oil through the Strait of Hormuz. How much could petrol and diesel become costlier? At present, there is no precise estimate of how much fuel prices may increase. However, based on the Macquarie report, it is being suggested that the current under-recovery could be passed on after the elections. In that case, petrol prices could rise by around ₹18 per litre and diesel by up to ₹35 per litre. However, such a sharp increase is considered unlikely, as fuel prices have never seen such a large single jump before. According to Anubhuti Sahay, Head of India Economic Research at Standard Chartered PLC, if crude oil prices stabilise around an average of $95 per barrel, the government may still need to increase petrol and diesel prices by ₹8 to ₹15 per litre. On the other hand, if crude oil remains in the $85–90 per barrel range, petrol prices may need to be raised by around ₹3 to ₹7 per litre. Why has India not increased fuel prices so far? Petrol and diesel retail prices are not directly fixed by the government but by oil marketing companies. Since June 2017, India has followed a “dynamic pricing system”, under which fuel prices are revised daily instead of every 15 days. However, the government still plays an indirect role in guiding pricing decisions. Since fuel and LPG prices directly affect the common public, they are also politically sensitive issues. For this reason, governments often try to keep prices stable during elections to avoid public backlash. This is why the decision to not raise fuel prices despite global oil shocks has been linked to state elections. According to DBS Bank Executive Director Radhika Rao, authorities tend to avoid passing the full burden of higher crude oil costs on to consumers, and the policy stance remains cautious during election periods. There is also historical evidence of this trend. A report by The Print, based on data from the Petroleum Planning and Analysis Cell (PPAC), shows that fuel prices are often kept unchanged before elections and adjusted afterwards. According to the report… Despite rising global crude oil prices, keeping retail fuel prices unchanged leads to losses for oil companies. As a result, even when international prices fall, retail fuel prices are not always reduced immediately, allowing companies to recover earlier losses. How much loss are oil companies facing? Answer: Petrol prices were last increased in May 2022, although premium petrol has seen a rise of around ₹2.35 per litre. Private retailer Nayara Energy increased petrol prices by ₹5 per litre and diesel by ₹3 per litre in March. However, government-linked oil marketing companies dominate the market and have not increased prices. These include Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. In March alone, these companies reportedly incurred losses of around ₹2,400 crore per day. The Macquarie Group Limited estimates that a $10 per barrel rise in crude oil leads to a loss of around ₹6 per litre for Indian oil companies. If crude oil prices rise to between $135 and $165 per barrel, Indian companies could face losses of around ₹18 per litre on petrol and ₹35 per litre on diesel. If losses are happening, how is the government managing it so far? In India, the pricing structure of petrol and diesel operates in multiple layers. Apart from the price of crude oil in the market, government levies and taxes also have a major impact on fuel prices. In this system, when global crude oil prices rise, the government does not immediately pass on the increase to consumers. It may first reduce excise duty or allow oil companies to absorb losses for a period. This is often referred to as a form of counter subsidy. When crude oil prices fall, retail fuel prices are not always reduced immediately. Instead, oil marketing companies are allowed to recover earlier losses over time.
Before the Iran conflict, the Indian government charged ₹21.9 per litre as excise duty on petrol and ₹17.8 per litre on diesel. On March 27, excise duty on both petrol and diesel was reduced by ₹10. Despite this, oil companies reportedly faced daily losses of around ₹1,600 crore in April. Since the Iran conflict began, India has been importing an average of 1.5 million barrels of crude oil per day from Russia. This could increase to 2 million barrels per day. For the first time since 2019, India has also imported oil tankers from Iran. In addition, crude oil imports are coming from the United States and African countries. The Petroleum Ministry stated in March that only about 30 percent of India’s oil now comes through the Hormuz route, while the remaining 70 percent is sourced through other routes. If petrol and diesel prices rise, what will be the impact? A rise in petrol and diesel prices will directly affect household expenses.