This policy brief was originally published by the Indian Council for Research on International Economic Relations (ICRIER)
Government intervention to limit energy price increases is common across the globe, given the large share of energy in household expenditure and the political sensitivity of fuel prices. Hence, countries are responding by providing subsidies or reducing taxes.
Thus far, India has shielded consumers and producers from higher international fuel prices in the wake of the Middle East war, absorbing the impact through subsidies and reductions in taxes. While this approach has provided short-term relief, it has shifted the burden onto the budget, weakened price signals, and heightened macroeconomic vulnerabilities, particularly through pressures on fiscal and external balances.
The authors estimate that the fiscal cost of shielding Indian consumers amounts to approximately US$28 billion, or 0.58 per cent of GDP on an annual basis. According to them, this estimate may be conservative, as the rupee has depreciated against the dollar in early 2026 and because of the likely underestimation of consumption. In nominal terms, this estimate is broadly comparable to the FY2025–26 central budget allocation for agriculture and exceeds the central government’s allocation for public health. It is also roughly three times larger than explicit fossil fuel subsidies in 2024 (0.20 per cent of GDP), which were largely concentrated in domestic natural gas.