India's crude oil basket has surged to nearly $120 per barrel in October 2026, marking its highest level since March 2012 when it averaged $123.61 per barrel. According to reports from Business Standard, this price surge threatens to squeeze oil marketing companies' (OMCs) margins while stoking inflationary concerns and adding to the Centre's fiscal pressures amid mounting fertiliser subsidy costs. For India, which relies heavily on imported crude, a prolonged price surge could widen the current account deficit and leave the government with less fiscal room. The extent of the economic fallout will depend on how long crude prices remain elevated, particularly over the next three months, economists said.
OMCs remain caught between rising international crude prices and the difficulty of passing on higher costs to consumers. As reported by Business Standard, OMCs raised retail fuel prices by around ₹7.50 per litre in four tranches in May, but with crude prices crossing $100 per barrel after the West Asia war began, companies continue to face under-recoveries. Icra estimates under-recoveries of ₹8 per litre on petrol and ₹9 per litre on diesel as of September 23, with diesel under-recovery since doubling to around ₹20 per litre. Among major OMCs, Hindustan Petroleum Corporation is most vulnerable due to its low refining-to-marketing ratio of only 51% compared to 74% for Bharat Petroleum Corporation and 80% for Indian Oil Corporation. The losses have widened since September, with Prashant Vasisht from Icra noting that OMCs may require extra support if under-recoveries continue in the third quarter as well.
The sustained price surge is already impacting India's inflation metrics. According to Bank of Baroda's chief economist Madan Sabnavis, wholesale price index-based inflation rose to 11.4% in September from hovering close to 10% since May. The Reserve Bank of India has raised its projection for consumer price index inflation to 5.2% from 5% this month, while the Monetary Policy Committee hiked the policy repo rate by 25 basis points to 5.5% and shifted to 'calibrated tightening' stance. Sabnavis expects India's retail inflation to hover around 5-6% in the coming quarter, with the fiscal deficit projected to reach 4.6% of GDP against the Budget projection of 4.3%. "If crude oil prices remain elevated for the next three months, the immediate effect would be visible on wholesale inflation as manufacturers would bear the high input price," Sabnavis said, adding that manufacturers are unlikely to pass on the burden to consumers until the festive season ends.
The Centre faces a parallel fiscal challenge from fertiliser subsidies, with more than 58% of the FY27 Budget Estimate of ₹1.70 trillion already exhausted in the first five months. As reported by Business Standard, if the current trajectory continues, the fertiliser subsidy bill could exceed the allocation by more than 76%, reaching around ₹3 trillion - the highest annual fertiliser subsidy bill on record. There has been some relief on the input-cost front, with urea prices falling from nearly $950 a tonne to around $390 a tonne between May and September 2026. However, persistently high di-ammonium phosphate (DAP) and sulphur prices could limit the decline in the overall subsidy burden. Natural gas prices have risen substantially from around $10 per million British thermal units before the West Asia war to $28-29 per MMBtu afterwards, offsetting some relief from lower urea prices. India consumes around 70 million tonnes of fertilisers annually, with urea accounting for approximately 40 million tonnes.
The prolonged oil price surge poses significant risks to India's economic growth prospects. According to Chief Economic Adviser V Anantha Nageswaran's scenario analysis reported by Business Standard, if crude oil prices rise to $130 per barrel and stay elevated for two to three quarters, GDP growth could slow to 6.4% in FY27, with retail inflation rising to 5.5% and the fiscal deficit increasing to 5.6% of GDP. The government has already cut the special additional excise duty on petrol and diesel by ₹10 a litre to ease pressure on OMCs, but the move has come at a cost to the exchequer. The Centre's excise duty collections contracted nearly 23% year-on-year to ₹86,687 crore in April-August, according to the latest available data. The possibility of further retail fuel price increases may also be constrained by the approaching Uttar Pradesh Assembly election.
