From austerity calls to flight cuts, India feels the heat from high energy prices

India is witnessing a rise in austerity calls to curb energy use, alongside flight cancellations and a reduction in imports as supply chain disruptions stemming from the West Asia conflict have increased freight and insurance rates, while rupee depreciation is making imported inputs more expensive.

With India importing more than 85% of its crude oil needs, elevated global energy prices are threatening to sharply inflate the country's oil import bill and further weaken the domestic currency, which has lost more than 5% since the start of the Middle East conflict.

While official data so far has shown that India has managed to source crude oil from the international market to keep run rates at high levels, the reluctance to let retail oil prices rise in line with crude prices is putting pressure on refiners and creating another layer of economic headache for the government and refiners, analysts and industry sources said May 13.

Petroleum Minister Hardeep Singh Puri said May 10 that oil marketing companies were importing crude oil, gas and LPG at higher costs but were selling final products in the retail market at relatively lower prices to shield consumers, resulting in mounting losses of Rupees 10 billion per day ($105 million).

"The gap between global crude economics and domestic retail pricing is where state-run oil companies are taking the hit. The government has not increased prices, yet, but has responded with excise cuts, leading to a potential revenue shortfall. And this is seen to only postpone a price correction that still has to happen. A retail price increase is only inevitable," said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.

India holds 60 days of crude oil, 60 days of natural gas and 45 days of LPG rolling stock, with foreign exchange reserves at $703 billion, according to a government statement this week. "A huge cost is being borne by the nation as international crude prices are continuing at very high levels," the statement said. "Fuel conservation can ease this burden."

On May 10, Indian Prime Minister Narendra Modi said the country should reduce gasoline and diesel consumption through measures such as remote work and virtual meetings, as rising oil prices were placing significant pressure on foreign exchange outflows.

The government has encouraged citizens to diversify energy usage to piped natural gas and electric or induction cooktops, while making kerosene and coal available to ease pressure on LPG demand. States have been advised to facilitate new PNG connections for domestic and commercial consumers, the government said.

Crude oil prices are still more than 45% higher than levels seen before the start of the Middle Eastern conflict, though they have eased a bit in recent days. Oil futures settled lower May 13, as attention turned to US President Donald Trump's meeting with Chinese President Xi Jinping in Beijing. NYMEX June WTI settled down $1.16/barrel day over day at $101.02/b and ICE July Brent declined $2.14/b to $105.63/b.

Growth risks

The energy price shock is expected to push up core inflation and could affect economic growth in Asia's third-largest economy.

"The downside risks to the economy have begun materializing with over two months of unresolved West Asia conflict. Input cost pressures from the spike in crude oil and gas prices will weigh on growth. The shock extends beyond energy to freight and insurance costs, supply chains, and fertilizers, which can have a multidimensional impact on the economy," said Dharmakirti Joshi, chief economist at CRISIL, part of S&P Global.

He added that CRISIL expects real gross domestic product growth to slow to 6.6% in fiscal 2026-27 (April-March), from 7.6% in the previous fiscal year.

"Producers are expected to pass on the sharp rise in the cost of energy and other inputs, as well as trade and transportation, to consumers, which will likely raise core inflation. The conflict in West Asia has disrupted supply chains and pushed up international freight and insurance costs. This, coupled with a depreciating rupee, will increase the cost of imported inputs," Joshi said, adding that the Reserve Bank of India has projected CPI inflation of 4.6% for the current fiscal year.

Nomura said in an April research note that India was grappling with supply-side rationing and an acute margin squeeze within the manufacturing sector. "Core inflation will rise in India, due to the squeeze on manufacturing margins and select services, but we expect it to average close to the central bank forecast."

The impact is already being felt across sectors. Air India said May 13 it will rationalize services on select international routes between June and August due to airspace restrictions and record-high jet fuel prices.

"The adjustments have been made in response to a combination of factors, including continued airspace restrictions over certain regions and record-high jet fuel prices for international operations, which significantly impact the commercial viability of certain planned services," the airliner said in a statement.

Future roadmap

Industry leaders this week called for accelerated domestic production to reduce reliance on imports.

"Prime minister's pain points are oil and gold, India's two biggest import items. Given our geology and our existing assets, we can massively increase production quickly. It has happened in the past. Two things are required: privatization and self-certification in clearances," Anil Agarwal, chairman of Vedanta group, said in a social media post on X.

India's upstream policy momentum is set to accelerate through faster auctions, expanded exploration and strategic partnerships, as the Middle East conflict has made it imperative to build a buffer against potential supply bottlenecks, Ranjit Rath, chairman and managing director of state-run Oil India Ltd, told an industry conference.