India has slashed excise duties on petrol and diesel to protect consumers and rein in a potential spike in inflation, while imposing windfall taxes on aviation fuel and diesel exports, amid volatile global oil markets as a result of the Iran war.
Economists said the tax cuts will hit government finances.
Global oil prices have surged past $100 per barrel after the near closure of the Strait of Hormuz, which serves as a conduit for 40% of India's crude oil imports, since the U.S. and Israel first struck Iran on February 28.
In a government order released late on Thursday, India's finance ministry reduced the special excise duty on petrol to 3 rupees ($0.0318) per litre from 13 rupees earlier. It also cut the duty on diesel to zero from 10 rupees per litre.
The government did not say how much the duty cuts would cost. The move comes ahead of elections next month in four Indian states and one federal territory with Indian voters known to be extremely sensitive to higher prices.
"Government has taken a huge hit on its taxation revenues to ensure very high losses of oil companies, approximately 24 rupees a litre for petrol and 30 rupees a litre for diesel, at this time of sky high international prices, are reduced," Oil Minister Hardeep Singh Puri said in a post on X.
Madhavi Arora, an economist at Emkay Global, estimated the annualised fiscal hit to be nearly 1.55 trillion rupees. The duty cuts would absorb about 30% to 40% of annual losses of oil marketing companies on auto fuel at current prices, she added.
The yield on 10-year government bonds rose 7 basis points to 6.95%, its highest level in 20 months.
Shares of oil marketing companies like Bharat Petroleum Corp and HPCL rose more than 4% at the open, but later pared gains.
While fuel prices in India are technically deregulated, oil companies do not always raise prices when crude oil costs increase.
WINDFALL TAX ON EXPORTS
The diesel export tax was set at 21.5 rupees a litre as well as a 29.5 rupees a litre tax on the export of aviation fuel, the order said.
Between April 2025 and January 2026, India exported 14 million metric tons of gasoline and 23.6 million tons of gasoil. Most Indian state-run refiners have largely stopped exporting fuels, and Reliance Industries is the country's biggest fuel exporter.
The tax would ensure adequate availability of these products for domestic consumption, Finance Minister Nirmala Sitharaman said in a post on X.
India is the world's third-biggest oil importer and consumer and imports most of its fuel.
The South Asian country consumed 33.15 million metric tons of cooking gas last year, with imports accounting for about 60% of demand. About 90% of those imports came from the Middle East.
Prime Minister Narendra Modi and his government have stressed adequate arrangements are in place, including for the supply of fertilisers for the summer sowing season and coal to meet the rising demand for electricity.
