Why India needs rules to manage oil shocks

The headlines from West Asia and Eastern Europe carry the same uncomfortable subtext: the price of crude oil is no longer determined solely by supply and demand. It is shaped by sanctions, shipping disruptions, fragile ceasefires, and the calculations of producer cartels that often find higher prices congenial. Brent crude has held close to USD 95 a barrel for several months, and experience from 2008 and 2022 suggests that such geopolitical premia tend to persist.

For India, which imports more than 85 per cent of the crude oil it consumes, this is not an abstract concern. Every USD 10-per-barrel increase in crude prices typically raises pump prices by about `4.5 per litre, placing pressure on household budgets. Yet retail fuel prices have remained largely unchanged since May 2022, despite considerable volatility in global markets. This apparent calm reflects a form of managed stability. Oil marketing companies — Indian Oil, Bharat Petroleum, and Hindustan Petroleum — have absorbed a significant portion of the volatility. Estimates suggest that this entails substantial under-recoveries on both petrol and diesel, with corresponding effects on profitability and investment capacity.

Such arrangements, while providing short-term predictability, carry broader economic implications. The first is investment: resources absorbed at the retail level are resources not deployed towards refinery modernisation, green hydrogen, and the wider energy transition that India will inevitably navigate. The second is expectations: even without engaging deeply with petroleum economics, citizens recognise patterns, including the likelihood of deferred adjustments over time.

The third implication is more subtle but equally important: the attenuation of the price signal itself. When fuel prices remain static, consumption patterns adjust less dynamically. Households do not recalibrate commuting choices, and logistics operators have limited incentives to optimise routes. Over time, the economy forgoes the incremental adjustments that cumulatively build resilience to external shocks.

The argument for moving to a rule-based system is rooted in practicality, not ideology. What is needed is a simple, transparent framework that replaces discretion with predictability. One way to do this is to define a normal price band for crude oil, say USD 65 to 90 per barrel, within which retail fuel prices adjust freely in line with global markets. When prices move beyond this band, an automatic sharing mechanism can come into play: part of the increase is absorbed through calibrated reductions in central excise, while the rest is passed on to consumers.

Crucially, the system should work both ways. When global prices fall, a portion of the gains can be set aside into a stabilisation fund, with the remainder passed through to consumers. Over time, this creates a self-correcting buffer: good years finance the difficult ones. The result is a system that is predictable, even-handed, and less reliant on ad hoc interventions, while still protecting both consumers and fiscal stability.

India is well-positioned to operationalise such an approach. The digital public infrastructure developed over the past decade — from Aadhaar to UPI and direct benefit transfers — offers a robust foundation for targeted support in exceptional circumstances. In periods of sharp price increases, vulnerable groups such as farmers, transport operators, and low-income households could receive calibrated assistance without distorting price signals across the board.

Importantly, the broader reform orientation of the Narendra Modi government, particularly its emphasis on transparency, digitisation, and institutional capacity-building, provides a strong enabling context for advancing such rule-based frameworks in energy pricing. A durable framework would also require alignment across stakeholders. Oil marketing companies would benefit from greater predictability in pass-through mechanisms. State governments could play a complementary role by ensuring that tax adjustments remain consistent with broader stabilisation objectives. Consumers, in turn, would gradually adapt to modest and regular price movements as a normal feature of a responsive system.

India has successfully implemented far more complex reforms. The Goods and Services Tax required sustained coordination across jurisdictions, and the Aadhaar ecosystem evolved through iterative refinement before achieving scale. Compared to these, a rule-based fuel stabilisation mechanism is technically modest. The necessary data and policy instruments already exist; what remains is their systematic integration.

In an increasingly uncertain global energy environment, the objective is not to eliminate volatility but to manage it with clarity and consistency. A framework that combines market signals with institutional safeguards can strengthen both economic resilience and policy credibility. As geopolitical uncertainties persist, such an approach would position India to navigate external shocks with greater confidence and stability.

The writer is a Professor of Finance and PT Member, Economic Advisory Council to the Prime Minister; Views presented are personal.