The Grey Zone, Why India Needs a Rules Based Framework for Petrol Prices

India has deregulated petrol and diesel prices in name, but not fully in practice. The system still operates in the grey zone between market pricing and government control. As global crude oil prices rise and the rupee weakens, this hybrid system is coming under stress. The result is opacity, windfall gains during good times, and sudden losses during bad times. The data tells a clear story. Between 2022 and 2025, crude oil prices dropped from $99 t o$ 68 per barrel. Yet instead of falling, combined tax collections of central and state governments from petrol and diesel increased from Rs 524 crore to Rs 6.31 lakh crore. Consumers paid high prices while crude was cheap. Oil companies and governments pocketed the difference. This is not market pricing. This is managed opacity. India needs a clear, rule-based framework to determine pump prices—a framework that links pump prices to crude costs, exchange rates, company margins, and taxes, with all components transparent and verifiable. The proposed Fuel Price Transparency Framework (FPTF) offers such a solution.

The History: From Administered Pricing to Managed Deregulation

Before 2010, India followed the Administered Pricing Mechanism (APM) , under which the government fixed fuel prices. These prices had little connection with global crude oil markets. State-owned firms such as Indian Oil, Bharat Petroleum, and Hindustan Petroleum sold fuel at controlled prices, often below cost. The government later compensated them through subsidies, upstream support, and oil bonds. While this system protected consumers, it distorted price signals and burdened public finances. The subsidy bill was enormous, and the government had to borrow to finance it.

Reforms began on June 25, 2010, following the Kirit Parikh Committee’s recommendations. Petrol prices were deregulated. Diesel was deregulated in 2014, and daily price revisions were introduced in 2017. On paper, India shifted to market-based pricing. The idea was that prices would be determined by global crude prices, the rupee-dollar exchange rate, and competitive market forces.

But in reality, India never fully let go of the controls. Today’s system is best described as managed deregulation. Prices are linked to global prices and exchange rates, but government policy—especially taxes—determines the outcome. When crude prices fall, taxes rise, and oil companies retain higher margins, while consumers continue to pay the same high price. When crude prices rise, oil companies absorb losses as they delay price increases under government pressure. The asymmetry is baked into the system: consumers do not benefit when crude falls, but they are protected (temporarily) when crude rises. The result is a system that lacks credibility, distorts investment decisions, and creates windfall profits for some and hidden losses for others.

The Data: Windfall Gains During Good Times, Hidden Losses During Bad

The numbers are stark. Between 2022 and 2025, crude oil prices dropped from $99 t o$ 68 per barrel—a decline of 31 per cent. A truly market-linked pricing system would have seen petrol and diesel prices fall by a comparable amount. But they did not. Instead, combined tax collections of central and state governments from petrol and diesel increased from Rs 524 crore to Rs 6.31 lakh crore. That is a 1,200-fold increase. The government did not lower taxes when crude fell; it kept taxes high and pocketed the difference. Oil companies also benefited, as their marketing margins expanded.

When crude prices rise, as they have during the current West Asian war, the opposite happens. Oil companies are pressured not to raise prices too quickly, lest they fan inflation and provoke public anger. They absorb losses, which accumulate and eventually show up as reduced profits, reduced investment, or requests for government compensation. The system works for the government when crude is low; it works against the government when crude is high. But it never works for the consumer, who pays high prices regardless of the direction of crude prices.

This is not a sustainable system. It lacks transparency, predictability, and fairness. It is time for a rule-based framework.

The Solution: The Fuel Price Transparency Framework (FPTF)

The proposed Fuel Price Transparency Framework (FPTF) would calculate the pump price for petrol in a few simple steps, with all components visible and verifiable. Here is how it would work:

Step 1: Base cost from crude oil. If crude is at $100 per barrel and the exchange rate is Rs 93 per dollar, one barrel contains 159 litres. The base cost works out to about Rs 58.5 per litre. While only about 40-45 per cent of crude becomes petrol, refineries recover the total cost from all products—diesel, LPG, ATF, and others. In value terms, the full crude cost is distributed across the product basket, allowing us to treat our barrel of crude as equivalent to one barrel of petrol for pricing purposes.

Step 2: Ethanol blending. Petrol in India is blended with about 20 per cent ethanol. With petrol at Rs 58.5 per litre and ethanol at Rs 60 per litre, the blended cost comes to around Rs 58.5 per litre.

Step 3: Refining, marketing, and margins. Add about 15 per cent to cover refining, blending, transport, marketing, dealer commissions, and company margins. This brings the cost to roughly Rs 67.6 per litre.

Step 4: Taxes. With combined central and state taxes currently around Rs 28.9 per litre, the final pump price comes to about Rs 96.5 per litre—very close to prevailing prices in Delhi.

The FPTF makes pricing transparent. Crude costs, exchange rate impact, company margin, and taxes are all clearly visible. There are no hidden buffers or arbitrary adjustments. More importantly, it gives the government a ready-to-use tool to handle rising crude prices.

Scenario Analysis: How FPTF Would Work Under Different Crude Prices

Now that the government may soon announce a hike in pump prices, let us use the FPTF to estimate how petrol prices would change under different global oil prices and tax scenarios.

Scenario 1 (Current situation): Crude at $100 per barrel, exchange rate Rs 93 per dollar. Petrol price comes to about Rs 95-96 per litre. No price change needed.

Scenario 2 (Moderate increase): Crude rises to $120, r u p ee w e ak e n s t o R s 95. Wi t h o u tt a x c u t, p e t ro l g oes t o R s 108 p er l i t re . I f t h e g o v er nm e n t c u t s t a x es b y 10 p erce n t (f ro m R s 28.9 t o R s 26 p er l i t re), t h e p r i ceco m es t o ab o u tR s 106. I f cr u d e i s$ 115 and taxes are cut by 15 per cent, petrol can be kept around Rs 102.

Scenario 3 (Sharp increase): Crude rises to $130. Without tax cut, petrol reaches Rs 114 per litre. A 20 per cent tax cut reduces it to around Rs 109. A 30 per cent tax cut can keep it near Rs 106.

The arithmetic is straightforward. The policy choice is not. The government can decide how much of the crude price increase to pass through to consumers (by allowing prices to rise) and how much to absorb (by cutting taxes). Under the FPTF, both the pass-through and the tax cut would be visible. There would be no hidden buffers, no arbitrary delays, no opacity.

Beyond Pricing: A Three-Part Energy Security Strategy

The FPTF is not a standalone solution. India needs a comprehensive energy security strategy. The article proposes a three-part framework.

First, adopt a fuel-pricing framework like FPTF. This would link pump prices to crude costs, exchange rates, company margins, and taxes, with all components transparent. It would eliminate the grey zone of managed deregulation. It would align prices with market signals, encourage fair outcomes by preventing asymmetric gains, and protect oil firms from sustained losses.

Second, secure long-term crude contracts with Russia and other reliable suppliers. India imports nearly 90 per cent of its crude. The current war has demonstrated the risks of over-reliance on the Gulf region, which is subject to geopolitical shocks. Russia has offered discounted crude, and India has wisely increased imports. But this should not be a one-off response to sanctions; it should be a strategic shift. India should secure long-term contracts with Russia, as well as with other suppliers such as the US, Guyana, and Brazil. The government must not allow US pressure to decide where India buys oil. India’s energy security is India’s decision.

Third, invest aggressively in exploring domestic sedimentary basins. India has significant untapped oil and gas reserves, particularly in the Krishna-Godavari basin, the Cauvery basin, and the Rajasthan basin. Exploration has been slow due to bureaucratic hurdles, environmental regulations, and a lack of investment. The government should launch a mission-mode programme to accelerate exploration, offering fiscal incentives, fast-track clearances, and technology partnerships with global oil majors. Even modest discoveries would reduce import dependence and improve the balance of payments.

Conclusion: The Grey Zone Must End

India’s hybrid system of managed deregulation has outlived its usefulness. It worked for a while, allowing the government to collect high taxes when crude was low and shield consumers when crude was high. But the asymmetry has become too glaring. Consumers have not benefited from falling crude prices. Oil companies have been pressured to absorb losses when crude rises. The government has used fuel taxes as a piggy bank, raising them when crude fell and keeping them high when crude rose. The system lacks credibility.

A rule-based framework like FPTF would change that. It would make pricing transparent. It would align India with global best practices. It would give consumers confidence that they are not being overcharged. It would give oil companies predictable margins. And it would give the government a clear tool to manage the trade-off between inflation and fiscal prudence.

India imports nearly 90 per cent of its crude. For a country so dependent on foreign oil, low-cost supplies, diversified sources, and transparent pricing are no longer optional. They are essential for macroeconomic stability. The grey zone of managed deregulation must end. It is time for a clear, rules-based framework for petrol prices.

Q&A: Fuel Price Transparency and Energy Security

Q1: What is the difference between “deregulation” and “managed deregulation” as practiced in India?

A1: True deregulation would mean that petrol and diesel prices are determined solely by global crude prices, the rupee-dollar exchange rate, and competitive market forces, with no government intervention. Managed deregulation, as practiced in India, means that prices are formally “deregulated” but the government still influences outcomes through taxes, pressure on oil marketing companies to delay price hikes, and opaque margins. The article gives a stark example: between 2022 and 2025, crude oil prices dropped from $99 t o$ 68 per barrel, but combined tax collections from petrol and diesel increased from Rs 524 crore to Rs 6.31 lakh crore. Consumers paid high prices while crude was cheap. This is “opacity, windfall gains during good times, and sudden losses during bad times.” It is not market pricing; it is managed opacity.

Q2: How would the proposed Fuel Price Transparency Framework (FPTF) calculate petrol prices?

A2: The FPTF would calculate petrol prices in four transparent steps:

Base cost from crude oil: Convert crude price ( $/ ba rre l) t or u p ees p er l i t re u s in g e x c han g er a t e . E . g .,$ 100/barrel, Rs 93/dollar, 159 litres/barrel = Rs 58.5/litre.
Ethanol blending: Petrol is blended with 20% ethanol (ethanol at Rs 60/litre). Blended cost = Rs 58.5/litre.
Refining, marketing, and margins: Add ~15% for refining, blending, transport, marketing, dealer commissions, and company margins = Rs 67.6/litre.
Taxes: Add combined central and state taxes (currently ~Rs 28.9/litre) = final pump price ~Rs 96.5/litre.
All components (crude cost, exchange rate, margin, taxes) are clearly visible. The article notes that “there are no hidden buffers or arbitrary adjustments.”

Q3: What does the article reveal about government tax collections on petrol and diesel between 2022 and 2025?

A3: The article reveals that between 2022 and 2025, crude oil prices dropped from $99 t o$ 68 per barrel (a 31 per cent decline), yet combined tax collections of central and state governments from petrol and diesel increased from Rs 524 crore to Rs 6.31 lakh crore—a 1,200-fold increase. The government did not lower taxes when crude fell; it kept taxes high and pocketed the difference. Oil companies also benefited, as their marketing margins expanded. This is a clear example of “asymmetric gains”: consumers did not benefit from falling crude prices, while the government and oil companies did. The article argues that a rule-based system like FPTF would prevent such opacity.

Q4: Under the FPTF, what would happen to petrol prices if crude rises to $120 or$ 130, and how could tax cuts offset the increase?

A4: The article provides scenario analysis:

Current (crude $100, Rs 93/dollar): Price ~Rs 95-96/litre.
**Moderate increase (crude $120, R s 95/ d o ll a r) : * * Wi t h o u tt a x c u t : R s 108/ l i t re . Wi t h 10$ 115 and 15% tax cut: ~Rs 102/litre.
Sharp increase (crude $130): Without tax cut: ~Rs 114/litre. With 20% tax cut: ~Rs 109/litre. With 30% tax cut: ~Rs 106/litre.
The arithmetic shows that the government has a clear choice: pass through the price increase to consumers or absorb it through tax cuts. Under FPTF, both the pass-through and the tax cut would be visible. “There would be no hidden buffers, no arbitrary delays, no opacity.”

Q5: What is the three-part energy security strategy the article recommends for India?

A5: The article recommends a three-part energy security strategy:

Adopt a fuel-pricing framework like FPTF: Link pump prices to crude costs, exchange rates, company margins, and taxes, with all components transparent. This would eliminate the “grey zone of managed deregulation,” align prices with market signals, and protect oil firms from sustained losses.
Secure long-term crude contracts with Russia and other reliable suppliers: India imports nearly 90 per cent of its crude. The current war has demonstrated the risks of over-reliance on the Gulf. Russia has offered discounted crude, and India should secure long-term contracts. The government must not allow “US pressure to decide where India buys oil.” India’s energy security is India’s decision.
Invest aggressively in exploring domestic sedimentary basins: India has significant untapped reserves in the Krishna-Godavari, Cauvery, and Rajasthan basins. Exploration has been slow. The government should launch a mission-mode programme with fiscal incentives, fast-track clearances, and technology partnerships with global oil majors. Even modest discoveries would reduce import dependence and improve the balance of payments.
The article concludes that for a country that imports nearly 90 per cent of its crude, “low-cost oil, diversified supplies and transparent pricing are no longer optional. They are essential for India’s macroeconomic stability.” The grey zone of managed deregulation must end.

The Grey Zone, Why India Needs a Rules Based Framework for Petrol Prices