Modi Govt’s Overcautious Oil Market Reading Hurting Retail Fuel Customers

By K Raveendran

The Narendra Modi government’s position on fuel prices now looks less like prudent caution and more like an overly defensive reading of a market that has already absorbed much of the Iran-US risk. The more calibrated question, therefore, is not whether New Delhi is right to watch the West Asian security situation, but whether a two-month wait before reassessing retail fuel prices is justified when crude has failed to sustain a meaningful geopolitical premium.

The government’s argument rests on a familiar premise: oil markets can turn quickly, and India, as one of the world’s largest crude importers, cannot base domestic pricing decisions on a few days of calmer trading. That caution is not without logic. The Gulf remains central to global energy flows, the Strait of Hormuz remains a pressure point, and any direct threat to tankers, export terminals or insurance costs can change the arithmetic for Indian refiners almost overnight. A single disruption that affects physical supply, rather than merely raising political noise, can force importers to pay more, scramble for alternative cargoes and deal with a weaker rupee at the same time.

But this is only one side of the current market. The other side is more striking: crude has not behaved like a market preparing for a sustained war premium. Prices have moved after flare-ups, but the moves have been contained. Traders have treated isolated missile attacks and ceasefire violations as risks to be priced temporarily, not as evidence of a lasting supply shock. The market’s message is that violence without sustained disruption is no longer enough to lift crude decisively. Brent hovering in the low-to-mid $70 range, after having fallen sharply from earlier panic levels, suggests that participants are looking past sporadic skirmishes and focusing instead on supply, inventories and demand.

That is why the government’s caution now appears heavier than the market’s own assessment. If the oil market itself is refusing to climb on every provocation, it is difficult to argue that domestic consumers must continue paying as though the threat premium remains fully alive. The crude market is not risk-free, but neither is it signalling a crisis. It is, rather, signalling a wary normalisation: traders are alert to West Asian headlines, but not persuaded that every violation of a fragile understanding between Iran and the United States will interrupt barrels reaching global buyers.

The bigger force weighing on prices is the prospect of excess supply. Rising output expectations, restored flows, weaker demand signals and producer efforts to defend market share have shifted attention from shortage to surplus. This matters greatly for India. A market facing possible glut conditions is structurally different from one facing shortage. In a shortage market, governments and oil companies can defend price rigidity by citing replacement costs and uncertainty. In a surplus market, the same argument becomes thinner, especially when refiners benefit from cheaper crude while retail consumers see no proportionate relief.

Indian consumers are familiar with this asymmetry. Retail fuel prices rise quickly when crude becomes expensive, but reductions tend to arrive slowly, selectively and often after political calculation. Oil companies cite inventory costs, past under-recoveries, refining margins, currency fluctuations, taxes, freight, product cracks and working-capital pressures. Some of those factors are real. Petrol and diesel prices are not determined by crude alone. Refiners buy different grades at different times, product prices do not always move in line with crude, and a weaker rupee can offset part of the global price fall. Yet these explanations become less convincing when the direction of the market is clearly softer and the consumer is still asked to wait.

The two-month window is especially problematic. For the government, two months may seem a reasonable monitoring period in a volatile geopolitical setting. For households, transporters, farmers and small businesses, it is a long period of additional spending. Fuel prices feed directly into commuting costs, freight rates, agricultural operations and the price of goods moved across long distances. Even when retail inflation is contained, high fuel prices act as a hidden tax on consumption. They also reduce the visible benefit of lower global crude at a time when the economy could use broader cost relief.

The political economy of fuel pricing complicates the issue further. Petrol and diesel are not merely energy products; they are revenue instruments. Central and state levies make up a large part of the pump price, and governments have often relied on fuel taxation as a stable source of revenue. That fiscal dependence gives every administration an incentive to delay cuts unless public pressure becomes acute or elections create an immediate reason to act. Oil marketing companies, too, prefer to rebuild margins when crude softens, particularly after periods of price freezes or squeezed profitability. The result is a pricing system that is market-linked in theory but politically managed in practice.

This is where the government’s caution risks becoming indistinguishable from convenience. A genuine wait-and-watch approach would be more credible if it were accompanied by a transparent formula: for example, a commitment that if crude remains below a defined threshold for a specified number of trading sessions, retail prices will be reviewed. Instead, consumers are told that the situation will be watched, while the benchmark that would trigger relief remains unclear. That opacity strengthens the suspicion that uncertainty is being used as a buffer against passing on gains.

A more balanced policy would recognise both risks. There is room for a calibrated reduction, especially if crude remains around current levels and the rupee does not suffer a major slide. A modest cut would signal that consumers are not excluded from the benefits of lower import costs, while still leaving room for future adjustment if the geopolitical premium returns.

Such a move would also align domestic policy more closely with market reality. The market is not saying that the Iran-US deal has eliminated all risk. It is saying that the probability of a sustained supply shock has declined enough to remove a large part of the fear premium. That is a meaningful distinction. Governments should be more cautious than traders because they must plan for national energy security, not just daily price movements. But caution should not become inertia, especially when the cost is borne by consumers who have already endured long stretches of elevated pump prices.

The more defensible reading is that the Modi government is right to remain alert but wrong to postpone the consumer question for two full months. Oil prices are not collapsing, but conditions are favourable enough for a lower retail adjustment. The market has taken ceasefire violations in its stride, supply concerns have eased, and the emerging worry is oversupply rather than scarcity. If that balance holds, continued delay will look less like responsible risk management and more like a refusal to share the dividend of cheaper crude with the public. (IPA Service)