As pain mounts, a timely cut in petrol and diesel excise duty
With the Centre cutting the excise duty on petrol and diesel by Rs 10 per litre each, the burden of adjustment due to higher global crude oil prices is now shifting to the government. These cuts will adversely impact tax collections, and could possibly strain the fiscal maths. So far, the costs of higher oil prices — India’s crude basket has soared from $69 in February to $147.24 per barrel on March 24 — were being borne by oil companies. According to the petroleum ministry, “the combined daily under-recovery being absorbed by OMCs (oil marketing companies) is approximately Rs 2,400 crore”. The latest move will help to partially offset their under-recovery, and provide some respite to their financial position — shares of companies like Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation rose during early trading, but fell thereafter. Prices at the pump, however, remain unchanged.
The petroleum sector accounts for a significant share of government revenues at the Centre and in the states. In 2024-25, the sector’s total contribution to the exchequer stood at Rs 7.4 lakh crore, of which Rs 4.15 lakh crore flowed to the central government, with the balance Rs 3.25 lakh crore accruing to the states as per data from the Petroleum Planning and Analysis Cell. This includes revenue from taxes and duties imposed as well as dividends, royalty and other taxes accruing to governments. InUnion Budget2026-27, the government had pegged collections from just the special additional excise duties levied on motor spirit (petrol) and high-speed diesel oil at Rs 1.69 lakh crore. But it is difficult to accurately estimate the extent to which government’s revenues will be hit. As per a note from SBI research economists, the central government “is likely to suffer a net revenue loss of at least Rs 1.1 lakh crore in FY27”. The 10-year bond yield has risen to 6.925 per cent, pointing towards concerns over the fiscal maths.
The longer the conflict in West Asia continues, the greater will be the pain felt by economies across the world. With supplies getting disrupted, countries in Asia are already implementing policies such as work-from-home in order to curb energy consumption. The Indian government has now imposed an export tax on diesel in order to disincentivise exports, and ensure that domestic demand is met. But the question is: For how long will retail prices not be affected? While there are compelling considerations of the political economy that must be taken on board, if global crude prices remain elevated for long, the calculus will change.
- 1The Centre's decision to cut excise duty on petrol and diesel shifts the burden of high global crude prices from Oil Marketing Companies (OMCs) to the government. This move, while aiming to provide respite to OMCs, is projected to cause a significant revenue loss of at least Rs 1.1 lakh crore for the central government in FY27, impacting fiscal maths and potentially increasing the fiscal deficit. This highlights the government's balancing act between consumer relief, corporate stability, and fiscal prudence.
- 2Ongoing conflicts in West Asia significantly impact global crude oil prices, leading to supply disruptions and economic pain worldwide. India, like other Asian economies, faces challenges in energy security, prompting government actions such as imposing an export tax on diesel. This measure aims to disincentivize exports and ensure domestic fuel demand is met, underscoring how geopolitical instability directly influences national energy policies and economic stability.
- 3The Centre's power to levy excise duties on petrol and diesel stems from the Union List under Article 246 of the Constitution, specifically Entry 84. While the Centre collects these duties, a portion, like the Rs 3.25 lakh crore mentioned for states in 2024-25, accrues to states as per constitutional provisions for fiscal federalism. Changes in these duties directly impact both central and state revenues, highlighting the intricate financial relationship between the Union and states.
- 4High global crude oil prices and subsequent government interventions, like excise duty cuts, have multifaceted economic and social impacts. While OMCs initially bore "under-recovery" costs, the cuts shift this burden to the exchequer, potentially straining fiscal maths and increasing bond yields. Despite these measures, retail fuel prices may remain unchanged for consumers, indicating that the ultimate burden of elevated global prices continues to be absorbed by various economic actors, affecting inflation and household budgets.