The West Asia conflict has lifted energy prices, raised freight and insurance costs, and exposed India’s vulnerability to the Strait of Hormuz. The government has responded with fuel price increases. That has eased some pressure on public sector oil marketing companies. It has not solved the problem.
After the increases, the gap between the cost of supplying fuel and the retail price has narrowed. It remains large. Officials say state-run oil marketing companies still face under-recoveries of about Rs 30 a litre on diesel and Rs 6 a litre on petrol. On domestic LPG, the under-recovery is about Rs 700 per cylinder. Daily losses on petrol, diesel and LPG are still estimated at Rs 600-700 crore.
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This is the familiar Indian energy bargain. Consumers are protected from the full force of global prices. The bill is sent first to Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. Later, part of it returns to the Union Budget.
Oil dependence and the Hormuz risk
India imports most of its crude oil. It also imports about 60% of its LPG consumption. The risk is not only the price of crude or gas. It is the route. The petroleum ministry has said about 90% of India’s LPG imports pass through the Strait of Hormuz.
The Strait is not an abstract geopolitical chokepoint. It is a daily supply line for Indian kitchens, transport and industry. It carries roughly a fifth of global oil and LNG supply. When traffic through it is disrupted, India pays through higher prices, delayed cargoes, higher freight and tighter availability.
The government has tried to diversify crude imports. It says about 70% of crude imports now come through routes outside Hormuz, against about 55% earlier. That reduces one risk. It does not remove the LPG problem.
LPG subsidy bill grows sharper
Cooking gas shows the pressure most clearly.
The retail price of a 14.2 kg domestic LPG cylinder in Delhi is now Rs 942 after a Rs 29 increase. Ujjwala beneficiaries receive a Rs 300 subsidy, which lowers their effective price to Rs 642. The government’s estimated import-linked supply cost is above Rs 1,600 per cylinder.
The gap is not a rounding error. It is the policy.
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The Saudi Contract Price, the benchmark for LPG imports into Asia, has risen by about 46% between February and June. Domestic LPG production has been raised from about 32,000 tonnes a day before the conflict to 52,000-53,000 tonnes. That is a large operational response. It cannot offset import dependence.
The government has also cut the number of subsidised refills under the Pradhan Mantri Ujjwala Yojana from nine a year to four. Officials argue that average annual consumption by Ujjwala households is four to five cylinders. That is plausible as arithmetic. It is also a cut in entitlement.
The fiscal logic is clear. Support has been narrowed without withdrawing it. The political logic is equally clear. The government does not want to raise LPG prices fully. The corporate logic is harsher. OMCs are being asked to carry a subsidy that is only partly fiscal.
Petrol, diesel and the tax trap
The problem is not confined to LPG. Petrol and diesel are revenue instruments as much as fuels.
Excise duties and state value-added taxes on petroleum products help finance welfare spending, infrastructure and deficit management. When crude prices rise, the Centre and states have two choices. They can cut taxes and lose revenue. Or they can keep taxes unchanged and allow pump prices to rise.
Both choices have costs. A tax cut softens inflation but widens the fiscal gap. No tax cut protects revenue but pushes up household and transport costs. There is no painless option.
This is why India repeatedly falls back on administered adjustment. Prices are not frozen forever. Nor are they fully market-linked. They are moved in steps, usually late, and usually after OMC balance sheets have absorbed the first shock.
OMCs carry a public burden
IOC, BPCL and HPCL are listed companies. They have minority shareholders. They also perform public functions. They keep fuel available across the country. They absorb price shocks. They execute subsidy delivery. They manage supply during geopolitical stress.
The contradiction is old, but it becomes visible during a crisis. A listed company cannot indefinitely behave like a budgetary department. A government cannot allow household fuel prices to mirror every global spike. The burden therefore moves in circles: consumer, OMC, exchequer, taxpayer.
This is poor policy design. It is not fiscal prudence to hide subsidies in OMC accounts. Nor is it market reform to free prices in calm periods and cap them in crises without a formula.
Targeted fuel subsidies, not price suppression
The answer is not to abandon consumers to global volatility. Nor is it to suppress fuel prices for everyone.
India needs a clearer burden-sharing framework. The first principle should be targeted support. Subsidies should go to vulnerable households through direct benefit transfers. The price signal should remain visible for those who can afford it. Suppressing prices across all consumers rewards higher consumption and weakens OMCs.
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The Ujjwala subsidy is already targeted. That principle should be strengthened, not blurred. The government should publish the subsidy cost, the under-recovery borne by OMCs, and the expected compensation schedule. Hidden liabilities are still liabilities.
The second principle should be automatic tax adjustment. When crude prices breach a defined band, a limited and temporary excise adjustment could soften pump prices. When prices fall, duties could be restored. This would reduce arbitrary interventions and give states and consumers a clearer signal.
The third principle is reserves. India must use periods of low prices to build strategic petroleum reserves and commercial stocks. Reserves cannot replace imports. They can buy time during a supply shock. That is their purpose.
Energy security needs a price rule
The present crisis is not just about West Asia. It is about a policy habit. India waits for prices to spike, shields consumers for a while, pushes losses onto OMCs, then compensates some of the damage through the Budget.
That approach is politically convenient. It is economically untidy.
India needs market-linked fuel pricing with defined protection for the poor, transparent compensation for OMCs, and a predictable tax stabiliser. Without that, each oil shock will produce the same question, the same delay, and the same hidden bill.
Energy security begins with supply. It does not end there. It also needs honest pricing.