For India, which relies heavily on imported crude, a prolonged price surge could widen the current account deficit (CAD), increase the cost of shielding consumers from higher fuel prices and leave the government with less fiscal room. OMCs continue to face under-recoveries despite retail fuel price increases in May, while the fertiliser subsidy bill could exceed the FY27 Budget Estimate by more than 76 per cent if the current trajectory persists.
The extent of the economic fallout will depend on how long crude prices remain elevated, particularly over the next three months, economists said.
“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,” said Madan Sabnavis, chief economist at Bank of Baroda. “However, I wouldn’t expect manufacturers to pass on the burden to consumers until the festive season ends.”
Wholesale price index-based inflation, which had hovered close to 10 per cent since May, rose to 11.4 per cent in September. Sustained input-cost pressures could eventually feed into retail inflation, depending on companies’ pricing decisions and demand conditions. “Overall, India’s retail inflation may hover around 5-6 per cent in the coming quarter,” Sabnavis said.
The Reserve Bank of India (RBI) raised its projection for consumer price index (CPI)-based inflation to 5.2 per cent from 5 per cent this month. The Monetary Policy Committee also hiked the policy repo rate by 25 basis points to 5.5 per cent and shifted its stance to “calibrated tightening” from neutral.
OMC losses, fuel prices add to fiscal strain
OMCs remain caught between rising international crude prices and the difficulty of passing on the higher costs to consumers. Although petrol and diesel prices are technically deregulated, state-owned retailers have at times kept pump prices unchanged despite sharp movements in global crude prices, putting pressure on their marketing margins.
OMCs raised retail fuel prices by around ₹7.50 a litre in four tranches in May. However, with crude prices crossing $100 a barrel after the West Asia war began, the companies have continued to face under-recoveries.
“Even after the hike in retail prices of fuel, OMCs are recording under-recoveries,” said Madhavi Arora, chief economist at Emkay Global. “OMCs may require extra support if the under-recoveries continue in the third quarter as well.”
The losses have widened since September. On September 23, Icra had estimated under-recoveries of ₹8 per litre on petrol and ₹9 per litre on diesel. The under-recovery on diesel has since doubled to around ₹20 per litre, said Prashant Vasisht, vice-president and co-head of corporate ratings at Icra.
“OMCs are looking at the sustenance in crude oil prices. The geopolitical condition is very volatile right now and everyone is waiting for a breakthrough. However, if energy prices remain elevated at these levels, the firms might have to consider raising retail fuel prices for consumers,” Vasisht said.
Equirus Securities had earlier warned that sustained crude prices above $100 a barrel could pressure OMC finances, particularly if petrol, diesel and LPG prices remain unchanged. The impact would depend on retail-price pass-through, government policies and refining cracks.
Among the major OMCs, Hindustan Petroleum Corporation is the most vulnerable because its refining-to-marketing ratio is only 51 per cent, compared with 74 per cent for Bharat Petroleum Corporation and 80 per cent for Indian Oil Corporation.
The government has already cut the special additional excise duty on petrol and diesel by ₹10 a litre to ease the pressure on OMCs. But the move has come at a cost to the exchequer. The Centre’s excise duty collections contracted nearly 23 per cent year-on-year to ₹86,687 crore in April-August, according to the latest available data. The scope for another duty cut appears limited amid pressure on revenue collections.
The possibility of further retail fuel price increases may also be constrained by the approaching Uttar Pradesh Assembly election. Any delay in passing on higher international costs would prolong the pressure on OMC margins.
Fertiliser subsidies compound fiscal pressures
The Centre faces a parallel fiscal challenge from fertiliser subsidies. More than 58 per cent of the FY27 Budget Estimate of ₹1.70 trillion had already been exhausted in the first five months of the financial year. If the current trajectory continues, the bill could exceed the allocation by more than 76 per cent, reaching around ₹3 trillion. This would be 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, a key raw material for urea production, has become substantially more expensive, rising from around $10 per million British thermal units (MMBtu) before the West Asia war to more than $28-29 per MMBtu afterwards. This could offset some of the relief from lower urea prices, limiting the scope for a significant reduction in the fertiliser subsidy bill.
India consumes around 70 million tonnes of fertilisers annually, with urea accounting for approximately 40 million tonnes.
The combined pressure from oil-related support and fertiliser subsidies could complicate the government’s fiscal calculations. Sabnavis expects the fiscal deficit to reach 4.6 per cent of gross domestic product (GDP), against the Budget projection of 4.3 per cent.
“As OMCs register losses, the dividend revenue from them is likely to be nil for the government. Some support may come from disinvestment receipts, but fertiliser and oil subsidy may complicate the fiscal math,” he said.
Prolonged oil shock could weigh on growth
The risks extend beyond inflation and government finances to economic growth. In March, shortly after the West Asia war began, Chief Economic Adviser (CEA) V Anantha Nageswaran told Parliament’s Standing Committee on Finance that GDP growth could slow to 6.4 per cent in FY27 if crude oil prices rose to $130 a barrel and stayed there for two to three quarters.
Under that scenario, retail inflation could rise to 5.5 per cent, the CAD could widen to 3.2 per cent of GDP and the Centre’s fiscal deficit could increase to 5.6 per cent of GDP, Nageswaran had said.
By contrast, the CEA’s scenario analysis suggested that the macroeconomic impact would be limited if crude prices remained around $90 a barrel. At that level, GDP growth was projected at 7-7.4 per cent, with retail inflation at around 2 per cent. The CAD was estimated at 1-1.2 per cent of GDP and the fiscal deficit at 4.3-4.4 per cent of GDP.
The Indian crude basket averaged $101.31 a barrel in the first quarter of FY27 (April-June) and $96.11 a barrel in the second quarter.
The higher prices have also pushed up India’s import bill. Crude oil imports rose 46.4 per cent to $90.6 billion in April-September 2026-27, while the net oil and gas bill increased 35 per cent to $81.1 billion.
In FY23, when the Russia-Ukraine war disrupted global energy markets, India’s average CPI inflation rose to 6.7 per cent, above the RBI’s upper tolerance limit of 6 per cent.
A prolonged period of elevated crude prices could once again test India’s ability to absorb an external shock while containing inflation, limiting the strain on public finances and protecting growth.
