Rising Crude Oil Prices – Impact on India’s Economy

Crude Oil Latest News

• The US-Iran conflict has caused a sharp spike in crude oil prices, prompting the Indian government to hike fuel prices and raising concerns about the impact on inflation, growth, and the country’s external sector.

India’s Dependence on Crude Oil Imports

• India is one of the world’s largest consumers of crude oil and imports nearly 85% of its requirements. 
• This makes the Indian economy highly vulnerable to fluctuations in global oil prices, particularly during geopolitical crises in oil-producing regions like West Asia.
• Crude oil prices affect virtually every aspect of India’s economy, from household budgets and inflation to GDP growth, trade balance, exchange rates, and government finances. 
• A sustained rise in crude prices can therefore create cascading effects across the economy.

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Historical Context: A Decade of Low Oil Prices Ending

• Between 2011-12 and 2013-14, the Indian basket of crude oil ranged from $106 to $114 per barrel.
• After that, global crude prices fell sharply, dropping to nearly one-third of the previous levels. 
• For the next 12 years, the crude oil prices touch the $100 mark again.
• However, the first two months of the current financial year, April and May 2026, recorded the Indian basket of crude oil at $115 and $106 per barrel, respectively. 
• If prices remain near $100 per barrel for the full year, it would represent an increase of around 40% over the previous year’s cost.

Impact on Retail Fuel Prices

• Higher crude oil prices typically translate into higher retail prices for petrol, diesel, kerosene, and aviation turbine fuel (ATF). 
• However, the transmission is not always direct; governments often modulate the impact through taxes and subsidies.
• Interestingly, even when crude prices crashed during 2014-15 to 2020-21, retail prices of petrol and diesel often remained elevated due to higher excise duties imposed by the government. 
• In 2025-26, the price of petrol in Delhi stood at Rs. 94.8 per litre and diesel at Rs. 87.7 per litre.
• A sustained crude price spike would force the government to either pass on the increase to consumers, burdening household budgets, or absorb the cost itself through higher borrowings, eventually leading to higher taxes.
• Impact on Inflation
  • During the high oil price years (2011-12 to 2013-14), Wholesale Price Index inflation ranged between 5-9%, while retail inflation hovered around 9-10%.
  • When crude prices crashed (2015-16), WPI inflation turned negative at -3.65%, providing significant relief.
  • In 2021-22, when crude prices rebounded to $78 per barrel, WPI inflation surged to 13%.
  • If crude remains near $100 per barrel, India could witness a renewed surge in inflationary pressures, particularly affecting transport, food, and energy costs.

Impact on Economic Growth

• Higher crude oil prices have historically been detrimental to India’s GDP growth. Conversely, lower prices have supported faster economic expansion.
• Growth Trends
  • During 2015-16 and 2016-17, when crude was in the mid-$40s per barrel, India grew at 8% and above.
  • The Covid year (2020-21) saw a contraction of -5.78%, partly due to pandemic disruptions.
  • Higher oil prices raise input costs for industries, reduce consumer disposable income, and dampen private consumption, all of which slow down economic growth.

Impact on Trade Balance, Forex, and Exchange Rate

• India’s heavy dependence on crude oil imports means that higher crude prices worsen the trade deficit. A larger trade deficit must be offset by:
  • Surpluses on other accounts of the Balance of Payments, such as services exports and foreign investments.
  • Depreciation of the rupee against the dollar.
  • Drawdown of forex reserves.
• Historical Patterns
  • India’s trade deficit has consistently widened during periods of high crude oil prices.
  • The rupee has appreciated against the dollar only in two of the past 15 years, 2016-17 and 2020-21, both years when crude prices were below $50 per barrel.
  • The sharp depreciation of the rupee in the past year reflects weaknesses in the trade balance that have not been offset by surpluses on other accounts.

Impact on Government Finances

• Higher crude oil prices typically worsen the government’s fiscal deficit, the gap between government expenses and earnings. The government often resorts to additional borrowings to cover this gap.
• Key Concerns
  • Even during years of low oil prices, the government registered higher fiscal deficits, partly due to Covid-era expenses.
  • A sustained $100 per barrel crude price would likely cause significant fiscal strain, forcing the government to either raise taxes, cut subsidies, or borrow more.

Policy Responses and Way Forward

• To mitigate the impact of high crude oil prices, India needs a multi-pronged strategy:
• Short-Term Measures
  • Strategic Petroleum Reserves: Drawing down strategic reserves during price spikes.
  • Diversifying Crude Sources: Reducing dependence on West Asia by sourcing oil from Russia, the US, and other regions.
  • Calibrated Fuel Pricing: Balancing the burden between consumers and the government.
  • Forex Interventions: RBI measures to stabilise the rupee.
• Long-Term Strategy
  • Accelerating Renewable Energy Transition: Expanding solar, wind, and green hydrogen capacity.
  • Promoting Electric Vehicles (EVs): Reducing crude oil dependence in the transport sector.
  • Boosting Domestic Oil and Gas Production: Enhancing exploration and production activities.
  • Energy Efficiency Measures: Reducing overall energy consumption through technology and policy.
  • Coal Gasification and Alternative Fuels: Supporting initiatives like the recently approved coal gasification scheme.

Source: IE