Cut in excise duty shields consumers and oil majors, but risks fiscal slippage

The government’s decision to absorb the losses by cutting excise duties on petrol and diesel is expected to shield consumers and companies in the short term, but it could widen the fiscal deficit and raise borrowings if a long-term strategy for energy security is not put in place, experts warn. 

On Thursday, the Centre slashed the excise duty on petrol by ₹10 per litre, down from ₹13 while it reduced the duty on diesel by ₹10 to make it zero. 

“The government has taken a huge hit on its taxation revenues to ensure that the very high losses of oil companies (nearly ₹24/litre for petrol and ₹30/litre for diesel) at this time of sky-high international prices are reduced,” said Hardeep Singh Puri, Minister for Petroleum and Natural Gas, while announcing the decision on X. 

The decision is triggered by the disruption in energy supply due to the blockade of the Strait of Hormuz by Iran in retaliation for the military attacks launched by Israel-US on February 28. 

According to Narendra Taneja, a leading expert on energy policy and geopolitics, this decision has probably been taken with the expectation that the situation will improve soon. 

However, he warned, “It will impact the government’s budgetary planning, with a decline in excise collections and overall revenue. However, if the ongoing disruption continues for more than two months, then it will become difficult to sustain.” 

Why is the government taking risks 

According to experts, there are primarily two reasons for which the government is taking risks by cutting down the excise duties on oil. 

First, to insulate ordinary consumers of petroleum products. Second, to protect the financial health of India’s top companies responsible for importing, processing, refining, and distributing oil in India. 

“This is also to protect companies' balance sheets so that they do not become weak. At the end of the day, they have the mandate to source oil globally, and if their balance sheets are weak, they would face difficulty in negotiating better deals in the market,” Taneja said. 

India needs a long-term policy fix 

A detailed research report by Emkay, a global financial services firm, suggests that the current oil shock amid West Asia tensions should push India to rethink its energy strategy. It recommends that policy responses should be long-term, not just temporary fixes. 

To achieve long-term energy security, the report outlines a three-point plan: pushing for electric vehicles, expanding renewable energy, and building stronger strategic oil reserves. 

“Pushing EV adoption is the most impactful option, in our view, with the reintroduction of the demand subsidy. This could lower oil imports by an additional 4.5% by FY35. EV adoption should be paired with a continued focus on renewable energy, with focus on addressing execution bottlenecks like evacuation.” The report also says that continued investments are essential to build oil reserves. 

“India is sailing close to the wind at 5–6 days of strategic petroleum reserves (with access to additional commercial pools). Existing plans to expand to 22 days by FY32 cannot be rushed, but we expect continued investments to help reach 30 days by FY40,” it added.