An Opportunity in a Crisis, Why India’s Growing Oil Import Dependence Is a Policy Failure

An Opportunity in a Crisis, Why India’s Growing Oil Import Dependence Is a Policy Failure

How serious is the oil crisis for the Indian economy? What lessons must India draw from the current situation, where shortages and price increases have already begun to hurt economic activity? As the US-Israel war on Iran enters its second month, the closure of the Strait of Hormuz has sent shockwaves through global energy markets. For India, the world’s third-largest oil importer, the impact is immediate and severe. But the current crisis is not merely a geopolitical misfortune; it is the culmination of a decade of policy complacency. The Modi government had a window of opportunity—12 years of relatively benign crude oil prices—to reduce India’s crippling dependence on imported oil. It failed to seize it.

First, it is important to understand that the price of Brent crude oil, which dominates headlines, is not the proper indicator for gauging the impact of the oil crisis on Indian petroleum refining companies and the government’s finances. It is the Indian Basket crude oil price that needs to be tracked. As of March 19, the Indian Basket crude oil price was about $150 a barrel. Brent crude oil price on the same day hovered between $105 and $108 per barrel. The difference is not trivial; it is the difference between manageable pain and a full-blown economic crisis.

The Indian Basket crude oil price is derived from a mix of crude oil varieties comprising sour grade (an average of Oman and Dubai oil) and sweet grade (Brent oil), processed by Indian refiners in a 79 to 21 ratio. This mix causes a sharp variation between the prices of the Indian Basket and Brent crude. Indian refiners, therefore, have yet to face the full impact of higher crude oil prices on their operations. During the current financial year, ending in a few weeks, the average Indian Basket crude oil price was about $71 per barrel. This is slightly lower than the average of $78.56 a barrel in 2024-25. The current financial year may not fully capture the adverse impact of the West Asian war. However, the impact will be felt during the coming financial year, as the crisis shows no signs of an early resolution.

The Narendra Modi government has been relatively lucky with oil prices during its tenure since 2014. In the last three years of the Manmohan Singh government, average annual Indian Basket crude oil prices hovered between $105 and $112 per barrel. In the 12 years of the Modi government, annual average crude oil price has stayed between $46 and $93 a barrel, with seven of those years recording a decline in the annual average price over the previous year. Indeed, the annual average price of the crude oil used by Indian refiners fell by over 11 per cent and 5 per cent in the last two years.

This was a gift. A 12-year window of historically low and stable oil prices was a golden opportunity to fix the inherent problems of India’s rising dependence on imports in the petroleum sector. The country has done reasonably well in ramping up its renewable energy production capacity. But should the government have paid similar attention to reducing import dependence and increasing domestic processing of petroleum products? The answer, on the evidence, is a resounding yes.

There have been many policy pronouncements and new schemes in the last few years to reduce India’s oil import dependence. But the reality is sobering. Since 2014, India’s indigenous crude oil output has been falling every year. Domestic crude oil output fell from 35.9 million tonnes in 2014-15 to 26.49 million tonnes in 2024-25. In the current year, production from April 2025 to February 2026 was 23.81 million tonnes, signifying that the declining trend will continue this year as well. Note that the Indian economy was growing rapidly during these years and its demand for crude oil was also on the rise. Crude oil imports thus rose from 189 million tonnes in 2014-15 to 243 million tonnes in 2024-25. Dependence on imported crude oil thus went up from 84 per cent in 2014-15 to 90 per cent last year. For a government that came to power promising atmanirbharata (self-reliance), this is a devastating indictment.

The situation with petroleum products is no better. Indian oil refining and marketing companies have, of course, increased their domestic production, but this has not been enough to make any dent in their imports. From 2014-15 to 2024-25, India’s imports of petroleum products more than doubled from 21.3 million tonnes to 51 million tonnes.

Consider the case of liquefied petroleum gas (LPG) or cooking gas—the fuel that powers the kitchens of millions of Indian households. Domestic output of LPG has grown at a snail’s pace, from 9.84 million tonnes in 2014-15 to 12.79 million tonnes in 2024-25. But LPG demand has seen robust growth, from 18 million tonnes to over 33 million tonnes in this period. Thus, dependence on LPG imports has gone up from 46 per cent to 62 per cent. The government launched well-intentioned schemes to promote LPG use among rural homes, which naturally boosted its demand. But it did not take the necessary steps to increase domestic LPG manufacturing to meet that demand. The policy was half-complete: it increased consumption but did not secure supply.

One possible explanation for the absence of effective policies to promote atmanirbharata in crude oil and petroleum products is the modest rise in their international prices. Thanks to relatively benign international crude oil prices, India’s import bill for crude oil rose by an average annual rate of only 2.16 per cent in the 10-year period from 2014-15 to 2024-25. India’s cost of petroleum products imports rose at a slightly higher rate—an average annual increase of 9.5 per cent. But even that increase did not push either the oil companies or the government to take adequate steps to boost domestic output. Low prices bred complacency. The urgency that should have driven reform was absent.

The current crisis changes everything. The oil crisis that India is now facing will be a lost opportunity if the government does not come out with a detailed action plan on how it wishes to reform its oil exploration policies to make a material difference to India’s domestic output of crude oil. The new exploration policy, announced with great fanfare, has not yielded significant benefits. It needs a complete overhaul, with incentives that actually attract investment, clearances that are fast-tracked, and a regulatory environment that encourages risk-taking.

A more worrying outcome would be if the government fails to get the entire petroleum refining and marketing companies to take up the manufacturing of petroleum products, including LPG, in a big way. The public sector undertakings that dominate this sector have been marking time for a decade. They need to be given clear targets, adequate capital, and the freedom to invest. The private sector, which has shown its capacity in refining, needs to be encouraged to expand into production as well.

As for the government, it should examine its policies on the pricing of these products so that there is adequate incentive for companies to produce more without either a squeeze on their margins or an increase in their reliance on government subsidies. The current pricing regime, which keeps retail prices low through a complex system of subsidies and cross-subsidies, creates perverse incentives. It discourages domestic production and encourages consumption. A more market-oriented pricing system, with targeted subsidies for the poor, would send the right signals.

The war in West Asia is a crisis, but it is also an opportunity. It has exposed the vulnerability of India’s energy security. The next 12 months will be painful, with higher oil prices, a wider current account deficit, and slower growth. But the pain will be wasted if it does not lead to policy reform. The government had 12 years of benign oil prices to fix the problem. It did not. It cannot afford to waste this crisis as well. The time for action is now.

Questions and Answers

Q1: What is the difference between Brent crude oil price and the Indian Basket crude oil price, and why does it matter?

A1: The Indian Basket crude oil price is derived from a mix of sour grade (Oman and Dubai oil) and sweet grade (Brent oil) in a 79 to 21 ratio. This mix causes a sharp variation from Brent prices. As of March 19, the Indian Basket price was about $150 per barrel, while Brent was between $105 and $108. This difference matters because Indian refiners use this basket, and the higher price directly impacts their operations and the government’s finances.

Q2: How has India’s domestic crude oil production changed since 2014?

A2: India’s domestic crude oil output has been falling every year since 2014. It fell from 35.9 million tonnes in 2014-15 to 26.49 million tonnes in 2024-25. In the current year, production from April 2025 to February 2026 was 23.81 million tonnes, indicating the declining trend continues. Meanwhile, crude oil imports rose from 189 million tonnes to 243 million tonnes, increasing import dependence from 84% to 90%.

Q3: What is the specific case of LPG production and imports, and what does it reveal about policy failures?

A3: Domestic LPG output grew slowly from 9.84 million tonnes in 2014-15 to 12.79 million tonnes in 2024-25. However, LPG demand grew robustly from 18 million tonnes to over 33 million tonnes due to government schemes promoting rural LPG use. Consequently, dependence on LPG imports rose from 46% to 62%. The policy increased consumption but failed to secure domestic supply.

Q4: Why did the government not take adequate steps to boost domestic oil production despite having 12 years of relatively benign oil prices?

A4: The article suggests that low and stable oil prices bred complacency. India’s import bill for crude oil rose at an average annual rate of only 2.16% from 2014-15 to 2024-25, and for petroleum products at 9.5%. This relatively modest increase did not create enough urgency for either the oil companies or the government to invest adequately in boosting domestic output.

Q5: What specific policy reforms does the article recommend to address India’s oil import dependence?

A5: The article recommends:

1. A detailed action plan to reform oil exploration policies to boost domestic crude output.

2. A complete overhaul of the new exploration policy to attract investment and fast-track clearances.

3. Giving public sector oil companies clear targets and capital to increase manufacturing of petroleum products, including LPG.

4. Reforming product pricing to provide incentives for domestic production without squeezing margins or increasing subsidy dependence.