Bite the bullet

With under-recoveries at oil marketing companies (OMCs) mounting, the government needs to reassess its options. So far, the Centre has absorbed part of the burden. In late March, it cut special excise duties on petrol and diesel by Rs 10 a litre, foregoing an estimated Rs 1.5 lakh crore in annual revenue. In May, some of the burden was passed on to consumers, with oil retailers raising petrol and diesel prices by Rs 7.38 and Rs 7.52 a litre, respectively, in four tranches.

The hikes brought these losses down to Rs 600 crore a day. However, with crude oil trading above $110 a barrel, OMCs are estimated to be incurring under-recoveries of Rs 25 a litre. The squeeze on marketing margins has taken a toll on their financial performance. HPCL reported a loss of Rs 8,639.45 crore for April-September, against a profit of Rs 7,970 crore in the corresponding period of FY26. BPCL’s consolidated net profit in H1FY27 fell 77% year-on-year to Rs 2,990.35 crore.

This time, the Centre may have little room to cushion OMCs against higher costs, given its limited fiscal headroom. Although tax collections are on course to meet Budget estimates, spending on certain items, particularly fertiliser subsidies, could overshoot projections. Some expenditure could be pruned, but containing the fiscal deficit at the targeted 4.3% of GDP will be challenging. Although state-owned, OMCs are commercial enterprises and should have the freedom to make pricing decisions based on market conditions.

They cannot be expected to indefinitely absorb costs that should ideally be passed on to consumers. The government can, of course, extend financial support, but the burden would ultimately fall on taxpayers. A wider fiscal deficit could also put upward pressure on interest rates, hurting businesses and households. The more sustainable option is to allow OMCs to raise pump prices sufficiently to minimise their losses.

This would also be fair to shareholders, particularly minority investors. Equally, OMCs must lower retail fuel prices when crude oil prices decline. The government needs a transparent framework for managing fuel-price shocks, offering targeted support to vulnerable households rather than open-ended subsidies. Such assistance should be temporary, clearly defined, and fiscally sustainable. Admittedly, both the Centre and the states depend heavily on revenues from petroleum products.

In FY26, the sector contributed an estimated Rs 4.75 lakh crore to the exchequer, including dividends. However, sacrificing some of this revenue could yield substantial long-term benefits. Lower consumption of petrol and diesel would reduce India’s dependence on imported crude, easing pressure on the current account deficit and the rupee. A sustained reduction in fossil fuel consumption would also help the country meet its climate commitments. The government must, therefore, look beyond immediate revenue considerations and allow fuel prices to reflect market realities.