Fuel gets Rs 3 costlier: Rise in inflation or no impact? What it means for India

Petrol and diesel became Rs 3 costlier last week, and your monthly budget is set to feel a little heavier. The ongoing conflict in the Middle East has pushed global fuel prices higher, tightening energy supplies, with countries adopting a range of measures to manage the pressure.

In India, the government raised fuel prices for the first time in four years, a move that is set to push inflation higher. But beyond household digits, how will this fuel hike impact India’s economy?

‘No direct impact’

While immediate consumer price inflation shows an upward movement, according to SBI Research Ecowrap, "there is no direct impact of this hike on the fiscal situation."

The report noted that typically, fuel consumption levels recover quickly after an initial price change.

"Historical data shows that hike in petrol and diesel price has been followed by a decline in consumption immediately after the hike, only to recover thereafter with no decline visible in the annual consumption levels. Further, immediate impact on CPI inflation is likely around 15-20 bps in May-June 2026. So we revise our FY27 forecast to 4.7%. There is no direct impact of this hike on the fiscal situation," the report stated.

OMCs under pressure

Behind the price adjustment lies a deeper strain on oil marketing companies. The under-recoveries of OMCs on the sales of petrol and diesel are rising because retail prices remain unchanged for a long period.

"According to the Union Minister, OMCs are incurring losses to the tune of Rs 1,000 crore per day, which amounts to around Rs 3.6 lakh crore a year," the report mentioned.

The current increase in oil price by Rs 3 provides a relief of Rs 52,700 crore in under-recoveries, which is 15% of the expected total loss of the OMCs in financial year 2027.

The SBI report also laid out the wider fiscal implications if the government were to change the current tax structure on fuel.

"If we assume that the Government reduced the excise duty on petrol and diesel to zero from its current level of 11.9% and 7.8% respectively, it will lead to reduction in government revenue/gain of OMCs to the tune of Rs 1.9 lakh crore. This might increase fiscal deficit by 0.5% of GDP, if the government doesn't reduce the expenditure."

The overall loss of the government from an excise duty cut in the current fiscal, including the net loss from the Rs 10 duty cut in March, amounts to Rs 3 lakh crore.

Currently, 15% of the OMC loss is covered by the increase in retail price by Rs 3, and 53% is covered with a reduction in oil excise duty to nil.

The report added that if Centre's excise duty is reduced to nil, it also impacts the revenue collections of state governments.

"Our estimates suggest that states would lose Rs 0.8 lakh crore if Centre's excise duty is reduced to nil, keeping all else same. However, higher oil prices will benefit states by around Rs 30,000 crore, so the net impact of excise duty cut on states revenue would be Rs 50,000 crore," the report stated.

Ready to Make a Smarter Property Decision? Build Your Legacy with TOI Homes.