India has maintained a fuel price freeze since April 2022, making it nearly four years of unchanged retail rates despite extreme volatility in global crude oil prices. This extraordinary policy stance reflects a complex interplay of political and economic considerations. With Brent crude surging past $100 per barrel due to the West Asia conflict, state-run Oil Marketing Companies (OMCs) like Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation are incurring steep under-recoveries of approximately Rs 24 per litre on petrol and Rs 105 per litre on diesel, according to the Ministry of Petroleum and Natural Gas .
The primary driver is geopolitical. Brent crude prices have surged sharply from around $65 per barrel to over $100 per barrel following the West Asia conflict, dramatically increasing fuel production costs. However, domestic retail prices remain unchanged. In Delhi, petrol continues at Rs 94.77 per litre and diesel at Rs 87.67 per litre . The government has reduced excise duty to keep prices stable, but this hasn't been sufficient to offset the crude price surge, leaving OMCs to bear the remaining burden .
Elevated crack spreads—the difference between crude oil and refined product prices—are inflating OMCs' perceived under-recoveries without necessarily translating to equivalent real losses. ICRA maintains a stable outlook for crude oil refining supported by healthy product cracks, but assigns a negative outlook to fuel retailing due to steeply negative marketing margins . When crack spreads are elevated, OMCs' refining operations may remain profitable even as their marketing divisions incur losses. The "under-recovery" figures typically reflect the marketing segment's losses, not the integrated company's overall position .
According to ICRA estimates, at crude prices of $120-125 per barrel and long-term average crack spreads, marketing margins on petrol and diesel are estimated to be negative Rs 14 per litre and Rs 18 per litre respectively . This divergence between refining profitability and marketing losses highlights the complex, multi-segment nature of OMC operations that isn't captured by under-recovery figures alone.
The situation extends beyond auto fuels. ICRA estimates LPG under-recoveries could reach Rs 80,000 crore in FY2027 if current trends persist . The West Asia conflict has severely disrupted LPG supplies from a critical sourcing region, with approximately 90% of India's LPG imports traditionally passing through the Strait of Hormuz . International LPG prices have surged as a result.
OMCs have responded by increasing domestic LPG production by 30% since March 5 and procuring cargoes from the US and Australia to address supply-side issues . However, these alternative sources come at premium prices due to longer shipping distances and different pricing benchmarks. Despite these efforts, under-recoveries on domestic LPG sales remain high due to the substantial cost differential between international procurement prices and regulated domestic retail prices .
The government has allowed commercial LPG prices to rise—increasing the 19 kg commercial cylinder price by Rs 993 to Rs 3,071.50 in Delhi—while keeping domestic LPG prices unchanged for 33 crore consumers . This differential pricing strategy attempts to balance consumer protection with cost recovery, but the subsidy gap remains significant. Current subsidy arrangements cover only 56% of existing losses, with the financial gap for OMCs likely to widen .
The fiscal stress compounds through the fertiliser sector. Imported urea prices have nearly doubled since the West Asia crisis began, with tender prices rising from approximately $508-512 per tonne in February 2026 to $935-959 per tonne in April—an 84% increase in just two months . India has approved importing 2.5 million tonnes of urea at these record prices, shifting sourcing away from West Asia to alternative origins including Russia, Algeria, Nigeria, Egypt, Indonesia, and Malaysia .
The fertiliser subsidy bill is projected to rise to Rs 2.05-2.25 lakh crore in FY27, exceeding the budgeted Rs 1.71 lakh crore . This represents a roughly 20% increase at current price levels. Despite the cost escalation, the government maintains stable maximum retail prices—urea at Rs 266.5 per 45 kg bag and DAP at Rs 1,350 per 50 kg bag—absorbing the impact through subsidies to keep farming viable and prevent food price inflation .
The government's approach reflects a calibrated trade-off, absorbing fiscal pressure to maintain price stability and prevent inflationary spillovers. The excise duty reduction of Rs 10 per litre on both petrol and diesel, implemented in March 2026, is expected to cost the government Rs 1.5-1.7 lakh crore annually if maintained through FY27 . This represents a significant sacrifice of revenue at a time when the fiscal deficit is targeted at 4.3% of GDP for FY27 .
The Finance Ministry faces difficult choices. With crude prices remaining elevated and multiple subsidy burdens mounting, the sustainability of the price freeze approach is questionable. Government officials have acknowledged that if the conflict continues for 3-4 months or more, cutting excise duty "may not remain an option beyond a point" and may warrant "some pass-through of elevated costs to the retail level" . This recognition signals that maintaining current policy is becoming increasingly untenable.
A Rs 2-4 per litre increase in petrol and diesel prices would transmit to broader inflation metrics through multiple channels. The fuel and power basket inflation rose sharply to 1.05% in March 2026 from deflation of 3.78% in February 2026, demonstrating the immediate pass-through effect . Inflation in crude petroleum surged to 51.57% in March 2026 compared with deflation of 1.29% in February 2026 .
The fuel shock has already pushed Wholesale Price Index (WPI) inflation to a 38-month high of 3.88% in March 2026, with manufactured products inflation increasing to 3.39% from 2.92% in February 2026 . Barclays noted this marked the sharpest month-on-month increase since August 2023 . The Reserve Bank of India faces a complex balancing act, with current CPI at 3.4% in March 2026 (within the 2-6% tolerance band) but risks skewed to the upside if fuel prices rise further .
The government's recognition that "prices cannot be artificially held constant indefinitely" signals a potential shift toward market-based fuel pricing mechanisms . Recent actions support this interpretation: premium petrol prices increased by Rs 2-3 per litre in March 2026, industrial diesel rose by Rs 22 per litre, and commercial LPG increased by Rs 993 per cylinder .
The emerging approach appears to be a hybrid model—maintaining stable prices for mass consumption fuels while allowing market-based pricing for premium and commercial segments. Economists suggest that "targeted subsidies for vulnerable populations while allowing market-determined pricing for discretionary consumption, coupled with strategic petroleum reserve deployment" represents the most sustainable path forward .
However, political constraints remain significant. Two decades after formal deregulation in 2002, "politics still dictates petrol prices" . Electoral cycles, inflation concerns, and political optics have repeatedly intervened, preventing full pass-through of costs to consumers. With four major states going to polls in April-May 2026, the timing of any significant price increase remains politically sensitive .
The sustainability of India's current fuel pricing approach will depend on the duration of the West Asia conflict, the trajectory of global energy prices, and the government's ability to implement targeted subsidy reforms without triggering social or political backlash. The concurrent pressure from fuel and fertiliser subsidies creates a compounded fiscal challenge, with total additional pressure exceeding Rs 4 lakh crore annually when accounting for LPG under-recoveries, fertiliser subsidies, and excise revenue losses.
The government has demonstrated its commitment to consumer protection, but the fiscal mathematics are becoming increasingly unforgiving. A gradual transition toward more market-based pricing mechanisms, coupled with better-targeted subsidy support for vulnerable populations, appears inevitable. The question is no longer whether India will adjust its fuel pricing policy, but when and how quickly the transition will occur.
