On Sunday, Prime Minister Modi urged the country to reduce fuel usage by opting for public transport and working from home whenever possible. The Iran war has sent crude oil prices soaring from around $60 a barrel at the start of 2026 to over $100 today. Despite almost daily gyrations, as hopes for a peace agreement contend with fears of escalation, that represents a price hike of more than 50% in a very short period of time. For India, which imports nearly 90% of its oil needs and whose strategic petroleum reserves are slender relative to other major economies, this is a stress test of the first order.
GoI’s chief response has been to deploy fiscal resources to shield consumers from the worst of the price surge. The playbook is familiar: excise duty cuts, compression of oil marketing company margins, and subsidies embedded in the pricing framework. Domestic petrol and diesel prices have remained broadly unchanged since January. In April, retail petrol prices in India, which had been higher than in the US at the start of the year, slipped below them, a striking illustration of how far domestic prices have drifted from underlying costs.
The basic thrust of India’s response is underpinned by sound economic logic. When the retail prices of petrol, diesel, LPG and kerosene spike, the consequences can ripple swiftly through the economy, raising transport costs and the prices of essential goods. The poor tend to be hardest hit, since energy comprises a larger share of their household budgets. Absorbing some of the shock is therefore justifiable both to dampen second-round inflationary effects and to protect the most vulnerable. But how much and for how long are the crucial questions.
This is where the fiscal arithmetic deserves close attention. Assume that a 50% increase in crude oil prices translates into a 25% increase in the supply cost of petrol and diesel, given limited short-term adjustment in refining and distribution margins. Applying this to projected 2026 consumption yields a fiscal cost of approximately 0.6% of GDP on an annual basis.
That expenditure is broadly comparable to the entire central budget allocation for agriculture, and exceeds government spending on public health. Moreover the calculation is likely an underestimate, since it does not adjust for the rupee’s depreciation against the dollar earlier this year. At a time when fiscal consolidation remains a priority and public debt is declining only gradually, this is a substantial call on scarce budgetary resources.
There is also a targeting problem that complicates the equity argument for price suppression. Not all fuels have the same income-consumption profile. In fact, more than 80% of Indian households do not purchase petrol or diesel directly. The primary beneficiaries of cheap petrol are private vehicle owners, a constituency concentrated in the upper income deciles. Protecting the vulnerable is the right objective, but blanket price suppression is a blunt instrument for achieving it.
Applying the same back-of-the-envelope calculations to a cross-country sample suggests that India is somewhere in the middle of the pack of Asian oil-importers. Its fiscal exposure from maintaining unchanged prices is lower than in Indonesia, Malaysia, and Thailand. But it is higher than in less fuel-intensive advanced economies like Japan and Korea. Sri Lanka, the Philippines, and Vietnam have already raised domestic prices in response to rising costs, suggesting that price adjustment, managed carefully, is achievable even in economies with a significant share of low-income households.
Meanwhile India's strategic petroleum reserves—a buffer against exactly the kind of supply shock now unfolding—are a fraction of those maintained by other major economies. They amount to less than 2% of China's reserves, about 5% of the US', and 27% of South Korea's. With domestic crude production having fallen by around 26% over the past decade, and import dependence now approaching 89% of total oil needs, the combination of thin reserves and high dependence leaves India acutely exposed to geopolitical flashpoints. Addressing this vulnerability is a long-term project, but one that needs to begin in earnest.
None of this is to advocate for an immediate fiscal tightening or a sharp increase in retail prices. That would be economically disruptive and socially regressive. Instead, what is needed is a gradual, well-signaled restoration of price pass-through, accompanied by targeted support for the households that genuinely need protection. Apart from restoring fiscal prudence, this would also help maintain a level playing field between state-owned oil marketing companies and private retailers, absent which the sector is unlikely to attract the kind of investor interest that it needs to thrive in the long run.
GoI should also use this moment to address the structural issues that the crisis has thrown into sharp relief. Strategic petroleum reserves need to be built up to levels commensurate with India's import dependence. The renewable energy transition should be accelerated: the petroleum intensity of the Indian economy has barely shifted over the past five years. And the tax framework needs to be put on a sounder footing: the contribution of petroleum taxes to central government revenues has declined sharply over the last 5 years, partly due to the failure to adjust excise duties for inflation.
India has navigated oil shocks before and will navigate this one. The short-term instinct to cushion the blow for ordinary citizens is understandable. The challenge now is to ensure that this instinct is translated into carefully-targeted support rather than broad price suppression, especially if crude oil prices remain elevated for an extended period. And the structural reforms needed to reduce India's exposure to future shocks should begin now, not be deferred to the next crisis.
Aiyar is director, and Gupta is senior visiting professor, ICRIER
