The raw-material paradox: Why cheaper crude oil has not meant cheaper petrol
A decade of asymmetric taxation, a pandemic windfall captured by the state, and a diluted product sold at full price have combined to leave the Indian motorist paying record amounts for something that should, by any rational reckoning, cost far less
Chuppala Nagesh Bhushan
There is a puzzle at the heart of Indian fuel pricing that deserves more scrutiny than it typically receives. In 2014, crude oil — the raw material from which petrol is refined — traded at $105 per barrel. Indian motorists in Delhi paid ₹72 per litre at the pump. Today, the same crude costs roughly $96 per barrel, a decline of nearly 9%. Yet the same Delhi motorist now pays ₹102 per litre, and the Mumbaikar pays ₹111. The raw material became cheaper. The final product became dramatically more expensive. This is the Indian fuel paradox, and its explanation lies not in the global oil market, but in the domestic architecture of taxation.
The core mechanism is excise duty — a central government levy applied per litre of petrol sold. When the Modi government took office in 2014, this duty stood at ₹9.48 per litre, a figure that had been broadly stable for some years. What followed was a sustained programme of upward revision that would, over the next decade, transform fuel taxes from a modest revenue line into one of the government's most reliable income streams.
The logic is straightforward enough. When global crude prices fall, the retail pump price contains a widened margin between the cost of production and the price charged. A government committed to passing savings to consumers would reduce the retail price. The Indian government, by contrast, chose to capture that margin through higher excise duty, keeping retail prices roughly stable while directing the windfall to the exchequer. The consumer's bill did not fall; the composition of that bill simply changed.
The rule of asymmetry: every time global crude prices rose, the increase was passed promptly to consumers at the pump. Every time global crude prices fell, the benefit was captured by the state through higher excise duty. Citizens absorbed all the shocks; the government reaped all the recoveries.
The most vivid illustration of this asymmetry occurred in May 2020. As COVID-19 lockdowns emptied roads and grounded flights worldwide, global crude prices crashed by 69% — one of the sharpest contractions in the market's history. In a functioning consumer market, a 69% fall in the cost of the primary input should have reduced the retail price of petrol to somewhere in the region of ₹40 per litre. This would have delivered a meaningful transfer of purchasing power to a population already battered by income losses.
Instead, the government in May 2020 raised excise duty by a further ₹10 per litre — the single largest one-year hike on record. The pandemic discount was entirely captured by the state. The citizens who absorbed the economic shock of lockdowns also absorbed the cost of the exchequer's opportunism. Petrol remained above ₹70 per litre through the crisis, eventually rising past ₹100 as crude prices recovered and no commensurate reduction in duty was forthcoming.
The pattern repeated itself with remorseless consistency. When the Russia-Ukraine war erupted in 2022 and global crude prices spiked, retail petrol prices in India were raised by ₹5.6 per litre within weeks. When prices stabilised and crude fell again in 2023, retail prices remained locked at their elevated levels. The ratchet turns in only one direction.
🔴 Global Crisis: Prices Rise
🟢 Global Recovery: Prices Fall
This table reproduces what economists call asymmetric price transmission — a well-documented phenomenon in retail fuel markets globally, where upstream price increases are passed downstream rapidly while upstream price decreases are transmitted slowly or not at all. In India, the asymmetry has been not merely structural but deliberate, with excise-duty adjustments used explicitly to fill the gap that falling crude would otherwise have created in consumer prices.
There is a further dimension to the paradox that receives insufficient attention: product dilution. Since the government's ethanol blending programme was accelerated, the litre of petrol that an Indian motorist purchases is not pure petrol. It contains 20% ethanol — an alcohol-based additive derived primarily from sugarcane. Ethanol costs roughly ₹60–65 per litre at the wholesale level, approximately 20% less than petrol. Elementary arithmetic would suggest that blending 20% of a cheaper ingredient into petrol should reduce the final retail price by a commensurate margin.
It has not. The consumer continues to pay the full petrol price — now above ₹100 per litre — for a product that, by volume, contains a fifth of a cheaper substance. The saving from dilution has been absorbed into margins rather than passed to the pump. The motorist is, in effect, paying petrol prices for ethanol, in addition to paying the full force of excise duty calculated on the notional undiluted price.
The ethanol programme has a political economy dimension that compounds the concern. The primary beneficiaries of government-mandated ethanol procurement, at government-set prices, are distillers concentrated in electorally significant states — principally Uttar Pradesh and Maharashtra. The programme has been linked to enrichment of business interests adjacent to political networks. Citizens, meanwhile, pay a blended price that reflects neither the cheaper input cost nor any passing of the margin to consumers.
Taken individually, each of these policy choices carries a superficially plausible justification. Excise duty funds roads, railways, welfare programmes and subsidies for other goods. Ethanol blending reduces import dependency and supports farmers. Price stability during volatile global markets avoids consumer shock. The problem is that when these choices are assembled together and examined over a decade, a consistent pattern emerges: in every instance where a policy choice had to be made between benefiting the consumer and benefiting the state or connected interests, the consumer lost.
The conclusion is not that fuel taxes are inherently illegitimate or that the government has no claim on petroleum revenues. It is, rather, that the current structure is designed to ensure the consumer bears all the downside risk of global commodity volatility while the state captures all the upside. The mechanics of Indian fuel pricing are no longer meaningfully tied to the cost of global oil. They are driven by a system of permanently elevated taxation and product substitution that insulates the exchequer from the consequences of its own decisions while passing all costs to the motorist.
That the Indian consumer has absorbed these cumulative increases without organised political resistance is itself a phenomenon worth examining. It is perhaps easier to resent a visible price hike — as occurred in 2022 — than to detect the invisible mechanism by which cheaper inputs are steadily converted into expensive outputs through the quiet machinery of excise. For now, the pump meter ticks upward, and the paradox persists. ■
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