Petrol and diesel prices remained largely unchanged. This wasn't market magic. It was a deliberate government policy that forced state-run Oil Marketing Companies (OMCs)—Indian Oil Corporation, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd—to absorb massive under-recoveries.
The combined daily under-recovery absorbed by OMCs reached roughly ₹2,400 crore. While fuel prices rose 20-67% across neighboring countries, India's increases remained at just 8-9%.
The government's primary tool to offset these losses was a reduction in central excise duty by ₹10 per litre on both petrol and diesel, implemented in March 2026. However, this wasn't designed to lower pump prices. Instead, the excise reduction was retained by OMCs to partially cover their under-recoveries. The government extended fiscal support of approximately ₹1.23 lakh crore by allowing OMCs to absorb the impact of higher crude prices for 78 days.
This intervention came at a significant cost. Analysts estimate the reduction in excise duties has cost the government roughly ₹1.8 lakh crore annually in forgone revenue. The net fiscal impact, including related measures, reached ₹2.5-3 lakh crore (0.8-1% of GDP). This represents a substantial fiscal investment that the government now aims to recover through improved OMC profitability and higher dividend flows over the coming years.
The most striking aspect of the current situation is the asymmetric recovery between petrol and diesel margins. As of late June 2026, petrol margins have turned positive at ₹5-6 per litre, recovering from a loss position of ₹6 per litre in early June. In contrast, diesel continues to incur losses of ₹8-10 per litre, having only narrowed from ₹27-30 per litre losses over the same period.
This differential stems from several structural factors. During the crisis, diesel crack spreads—the difference between refined product prices and crude oil costs—surged to exceptionally high levels, touching $100 per barrel and above before easing to around $60-80 per barrel. Diesel demand is more inelastic due to its critical role in transportation, agriculture, and industry, while global diesel supply constraints were more severe during the West Asia conflict. Additionally, the ₹10 excise duty cut represented a much smaller proportional relief for diesel, which had peak under-recoveries of ₹81.90 per litre compared to ₹26 per litre for petrol.
Between May 15 and May 25, 2026, OMCs implemented four rounds of price increases, raising petrol by ₹7.35 per litre and diesel by ₹7.53 per litre cumulatively. These increases pushed petrol prices above ₹100 per litre in Delhi and brought diesel prices in several cities close to the three-digit mark. However, according to ICRA estimates, these hikes offset only 8% of OMC losses.
Even after these increases, OMCs were losing approximately ₹7.5 per litre on diesel and ₹3.2 per litre on petrol, with daily losses remaining at ₹700-800 crore on petrol, diesel, and domestic LPG combined. Analysts estimated that OMCs would need to increase auto fuel prices by up to ₹12 per litre to reach break-even, but political constraints prevented full cost pass-through due to inflation concerns.
The primary barrier is the government's strategy to support OMC debt repayment. The three OMCs accumulated substantial debt during the crisis period, and the government is allowing them to retain higher margins for an extended period to facilitate debt reduction.
OMCs are also facing significant inventory losses due to the rapid decline in crude prices. Indian Oil Corporation reported inventory losses of ₹6,465 crore in Q1 FY26, compared to a gain of ₹3,345 crore in the previous year. Additionally, continued LPG under-recoveries of approximately ₹700 per cylinder create cross-subsidization pressures, with diesel and petrol margins needing to cover these uncompensated losses.
The government's approach to price transmission follows a calculated multi-year strategy. In the first phase (0-6 months), current prices are maintained to allow OMCs to generate positive cash flows. The second phase (6-12 months) will see gradual price adjustments as debt decreases. The third phase (12-24 months) aims to return to normal pricing and restore full fiscal revenue from excise duties.
This strategy prioritizes long-term fiscal sustainability over short-term consumer benefits. The government views the ₹1.23 lakh crore fiscal support as an investment that must be recovered through higher dividend flows and tax revenues. Indeed, despite the excise duty reduction, total central revenue from the petroleum sector is projected to grow by 12% in FY25-26, driven by higher corporate tax collections and dividend income from improved OMC profitability.
The crisis was triggered by the closure of the Strait of Hormuz, which carries nearly one-fifth of global crude flows. India, which depends on imports to meet over 85% of its crude oil requirements, faced severe supply security concerns. However, the country's diversified crude sourcing strategy—particularly increased reliance on Russian oil, which accounted for up to 40% of imports during the crisis—combined with strategic petroleum reserves and pipeline infrastructure, enabled India to avoid fuel rationing despite these challenges.
The subsequent US-Iran peace agreement triggered multiple causal mechanisms that reduced international crude prices, including supply chain restoration, market psychology shifts, and production normalization. This price decline has provided substantial relief to India's import bill, which stood at $100.4 billion during April-January of FY26 against $114.1 billion during the same period of the previous fiscal.
The near-term outlook for OMC profitability remains positive if crude prices stay below $80 per barrel and refining margins remain elevated. Composite margins on petrol and diesel sales at state-run refiners have already risen above levels seen before the recent Middle East conflict. However, visibility on fuel marketing margins beyond fiscal 2028 remains limited due to uncertainty over fuel tax policy.
For consumers, the transmission of lower crude costs to pump prices will likely occur gradually as OMC debt levels normalize and the government's fiscal recovery objectives are achieved. This process is expected to take 12-24 months rather than occurring immediately in response to lower crude prices. The government's ability to balance consumer protection with fiscal recovery will determine the pace of this transition.
The West Asia crisis has fundamentally altered India's approach to fuel pricing, demonstrating that consumer protection comes at a substantial fiscal cost that must be recovered through sustained OMC profitability. As the country navigates this complex landscape, the lessons learned about energy security, fiscal management, and price transmission mechanisms will shape policy decisions for years to come.
