Fiscal Cost Of Holding Down Fuel Prices In India After West Asia War

This paper examines the macroeconomic and fiscal implications of the recent Middle East conflict–induced surge in global oil prices for India, a highly import-dependent energy economy. It highlights how supply disruptions and rising prices are affecting fiscal and external balances, while exposing structural vulnerabilities stemming from high import dependence and limited strategic reserves.The paper shows that India’s policy of shielding consumers from higher fuel prices through tax reductions, subsidies, and constrained price pass-through has provided short-term relief but entails significant fiscal costs, estimated at about 0.6% of GDP annually. These measures also weaken price signals, encourage inefficient energy use, and disproportionately benefit higher-income households. At the same time, declining petroleum tax revenues and limited adjustment for inflation have eroded the tax base and reduced the alignment of fuel prices with their social and environmental costs.The analysis argues that maintaining current pricing policies is increasingly unsustainable if high oil prices persist. It calls for a gradual restoration of price pass-through, targeted support for vulnerable households, and reforms to strengthen energy security, including expanding strategic reserves and accelerating diversification away from imported fossil fuels.This paper can be accessed here.This paper is authored by Sanjeev Gupta, Pratik Tiwary, ICRIER.(The views expressed are personal)