4 min readMar 28, 2026 02:35 PM IST
First published on: Mar 28, 2026 at 02:35 PM IST
The government has lowered the excise duty on petrol and diesel to protect the consumer as of now. It is not certain that this situation will remain. There can be further action depending on the course of the war in West Asia and the price of oil. At present, the price of fuel at the pump is unchanged for public sector companies, while one private company has announced an increase. So, for how long can the retail price be held on to?
Let us look at the structure of petrol prices in Delhi. At present, one litre of petrol costs Rs 95. Of this, the actual price charged by the oil marketing companies (OMCs) to the dealer is around two-thirds of the final price or Rs 63/litre post the excise cut. The excise component is now around 12.6 per cent — this is the amount that the government earns of Rs 11.90/litre. The dealer commission is around 4.6 per cent or Rs 4.40 per litre. And then there is the value-added tax, which is 16.2 per cent of the price. VAT, which is charged on an ad valorem basis, is one part of the price that varies across states. This explains why the price of petrol varies across states.
So far, the burden of higher oil prices is being borne by the OMCs. The 66.6 per cent share in the final price also includes a profit being earned by these companies which keeps getting reduced as the cost of crude goes up. The interesting bit is that while Brent had peaked at $118.4/barrel on March 20, the weighted average price for India is close to $150 per barrel. As of March 24, the average price was $147/barrel. The price was $ 71 on February 27, which was just before the war began. Add to this the rupee depreciation of 3.3 per cent during the period from February 27 to March 25, and the cost is up further. It can be seen from this that as long as the Centre and state’s share in the static final price remains unchanged, the same is absorbed by the OMCs.
Here, it must be pointed out that the OMCs earned a higher profit when the price of oil came down to the range of $60-70 per barrel as the consumer price was unchanged at Rs 95/litre and the excise and VAT rates remained unchanged. The government did impose a supernormal profit tax on these companies and hence the gain was apportioned between the two.
However, with the cost of crude increasing sharply, the government has to take a call on apportioning this amount. In the Union budget for FY27, it has been assumed that collections from the excise tax would be Rs 3.88 lakh crore as against Rs 3.36 lakh crore in FY26. The present reduction in excise duty would mean a decline in tax collections. A similar action could also be considered by states. The option to increase the retail price can be exercised and doing so will probably steady the fiscal maths of the government. However, it will run the risk of pushing up inflation at a time when there is already concern over the possibility of this being an El Nino this year.
On balance, it may just be a matter of time before the price matrix is revised. It does look as if the next level of intervention will be at the consumer end, if and when required.
The writer is chief economist, Bank of Baroda. Views are personal
