India's state-owned enterprises (SOEs), known nationally as Public Sector Undertakings (PSUs), were established to serve national objectives of providing energy security, affordability, supporting strategic industries, generating employment in underdeveloped regions, and stabilizing the economy during downturns. Energy sector PSUs sit at the centre of India’s energy transition. They mine most of India’s coal, produce and refine most of its crude oil, pipe most of its natural gas, and generate most of its electricity. They are also among India’s largest public sector employers, investors, and contributors to the public exchequer. Niti Aayog’s recent report suggests that public investment in electricity grids, electric vehicle (EV) charging, and green technology research and development (R &D) is critical to crowding in private capital and lowering the cost of the net-zero transition. What these PSUs do over the next decade will shape whether India meets its 2030 clean energy targets and its 2070 net-zero commitment and whether the millions of workers and communities that depend on fossil fuel sector experience an orderly transition or a disruptive one.

Through its Mapping India's Energy Policy initiative, IISD has tracked government support to India’s energy sector since 2014. In FY 2025, out of USD 78 billion of total energy support by the government, PSU capital expenditures accounted for USD 26 billion, making these enterprises not just producers of energy but the principal implementing arm of India’s energy policy. This digital story extends that analysis by examining nine strategic PSUs across economic, environmental, and social dimensions, assessing their alignment with national transition goals, and identifying the policy levers that can accelerate a just and credible energy transition.

Why These Nine Energy PSUs Matter

India has around 66 listed central PSUs, but only a handful anchor the country’s energy system. This digital story focuses on nine such energy PSUs: Coal India Limited (CIL), NTPC Limited (NTPC), NLC India Limited (NLCIL), Oil and Natural Gas Corporation Limited (ONGC), Oil India Limited (OIL), Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL), GAIL (India) Limited (GAIL), and NHPC Limited (NHPC).

Together, these enterprises manage India’s most significant fossil fuel assets while also developing some of the country’s largest renewable energy projects (see below). Their dual portfolios give them a uniquely important role in shaping both India’s current emissions trajectory and its clean energy future.

The Interconnected Web of Growth, Development, and Carbon

India’s nine energy PSUs carry an enormous economic and social footprint. In FY 2025, their combined revenues reached around INR 26 trillion (USD 307 billion), equivalent to 7.7% of India’s GDP, and they transferred approximately INR 6 trillion (USD 70 billion) to the Union and state governments through taxes, dividends, and other payments (see below). They remain major public investors through sustained capital expenditure of about INR 2.6 trillion (USD 31 billion) and contribute to national priorities, including corporate social responsibility (CSR), R&D, and large-scale employment. Their trade footprint is equally significant: these PSUs account for a substantial share of India's merchandise imports through purchases of crude oil, natural gas, and petroleum products on international markets, while also generating foreign exchange earnings through exports of refined petroleum products and other energy commodities. Their scale and financial weight make them central to India’s economic trajectory and energy transition.

However, this economic and social weight is mirrored by a highly concentrated carbon footprint. Eight of the nine energy PSUs—except NHPC, which is a hydropower producer—report 488.5 Mt of direct CO₂e emissions from their own operations, which is 11% of India's national total of 4,371 Mt CO₂e. That figure, taken alone, would suggest a modest footprint for companies that collectively dominate the country's energy system.

But these companies do not just consume energy. CIL mines coal that central and state utilities and industries burn. PSU refiners sell fuels that power hundreds of millions of vehicles. When the downstream combustion of what they sell is included on a responsibility attribution basis, the combined figure rises to an equivalent of 44% of India's emissions. The figure below shows both measures, side by side, for each company.

As shown below, India’s energy PSUs are linked through a cascading chain of energy flows. CIL coal sales generate Scope 3 emissions for CIL, and become Scope 1 emissions for NTPC, and finally result in Scope 2 emissions for oil PSUs that purchase grid electricity. This sequence illustrates how one PSU’s output becomes another’s emission source, revealing the deep interdependence of India’s fossil-based energy system and the need for joint action across coal, power, and petroleum sectors, since emission reductions in one PSU directly affect the other PSU.

This concentration of emissions within publicly controlled entities presents a challenge but is also a significant opportunity for climate mitigation at scale in India. Unlike fragmented private sector emissions that require diverse policy instruments to influence, public sector emissions can be addressed through direct government ownership mechanisms, coordinated strategies, and aligned institutional mandates, backed up by appropriate government support policies.

Can PSUs bridge India’s renewable capacity-generation gap?

India’s 2035 goal of sourcing 60% of its installed electricity capacity from non-fossil sources highlights a significant gap between current capacity and the level of reliable clean power needed. The pace and direction of PSU investment will be critical not only for adding capacity but also for ensuring that renewable energy can be delivered reliably and at scale. In the early phase of renewable expansion, NTPC played a key enabling role by supporting private developers through long-term power purchase agreements, helping reduce risks and attract investment. As the market has evolved, NTPC has increasingly shifted toward building its own renewable portfolio and supporting projects that can provide more reliable power.

Even under an earlier target of 50% of installed electricity capacity from non-fossil sources, India identified the need to reach approximately 500 GW of non-fossil electricity capacity, up from around 275 GW in February 2026. Yet overall, the pace of renewable deployment has fallen short of what India’s 2030 targets require. Renewable capacity additions since FY 2021 have averaged only 20 GW per year, and in FY 2025, India added approximately 30 GW of renewable capacity. Supply-chain disruptions, fluctuating module prices, tighter financing conditions, and bottlenecks related to evacuation infrastructure, rights of way, and land have slowed renewable deployment.

Within this evolving landscape, PSUs are uniquely positioned to lead. Their access to concessional finance, land, and strong balance sheets enables them to invest in long-gestation projects. Moreover, PSUs such as NHPC and THDC India Limited (an NTPC subsidiary) bring decades of hydropower experience, positioning them to expand pumped-storage capacity, which is essential for reliable renewable power. Ultimately, India’s transition is moving from rapid capacity growth to reliable clean power delivery, and PSUs will play a central role in bridging this gap.

Rising Energy Transition Ambition but Slow Progress

Across their portfolios, India’s nine energy PSUs are signalling rising clean energy ambition, but their formal decarbonization commitments remain uneven. They are expanding into solar and wind portfolios, green hydrogen, batteries, pumped storage, critical minerals, biogas production, second-generation biorefineries, and EV charging networks. However, operational net-zero targets are patchy: some, but not all, of the nine PSUs have set net-zero goals for Scope 1 and Scope 2 emissions, highlighting an ambition gap between project-level renewable targets and whole-of-company decarbonization (see below). Only GAIL has adopted a Scope 3 target, aiming to reduce these emissions by 35% by 2040, a practice others could emulate to align more closely with India’s long-term net-zero pathway.

Progress to date is slower than these ambitions imply. Most concrete action has focused on adding renewable capacity, while comprehensive fossil-asset transition plans and just transition roadmaps remain limited. Interim measures, such as biomass co-firing and flexible coal operations, can reduce emissions in the near term, but they risk creating new dependencies if they are not anchored in clear long-term phase-down pathways. Emerging options like first-generation biofuels and coal gasification with carbon capture also carry significant uncertainties, including life-cycle emissions, high costs, technological readiness, and land and water trade-offs. These technologies may have niche roles, but large-scale deployment should be approached cautiously, particularly as more mature, cost-effective clean energy alternatives continue to improve.

The table below situates these PSU commitments within India’s wider transition goals for renewables, biowaste-to-energy, electric mobility, and green hydrogen, and summarizes the incentives supporting them. It also highlights the gap between ambition and implementation: while PSU targets for renewables and green hydrogen are expanding, progress on biowaste-to-energy, electric mobility, and hydrogen deployment remains modest, underscoring the need to accelerate PSU delivery to align with India’s broader transition trajectory.

Capital Expenditure: Fossil investments still dominate

India’s nine energy PSUs illustrate a dual mandate trap: they are expected to safeguard short-term energy security and fiscal revenues attained through fossil fuel operations while also advancing decarbonization objectives, and this tension is evident in their capital expenditure patterns. In FY 2025, these enterprises collectively invested INR 2.33 trillion (USD 28 billion) in fossil fuel-based projects, nearly eight times their combined INR 0.30 trillion (USD 4 billion) investment in clean energy. While the 5-year capital expenditure plans of these PSUs include an upward trajectory in clean energy investments, the overall investment mix remains heavily tilted toward fossil energy assets.

Most of these fossil investments fall into two categories. The first involves adding new coal-fired capacity and increasing mining capacity, in line with government plans to meet accelerating electricity demand. For example, NTPC aims to become India’s largest captive coal miner, integrating fuel security with power generation, while NLCIL continues to expand lignite mining and thermal capacity. The second category comprises oil PSUs' investments in pipeline networks, refinery expansions, and petrochemical integration. These investments align with the government’s objective of increasing natural gas share in India’s primary energy mix to 15%, while also hedging against future declines in transport fuel demand through the diversification of refineries into petrochemicals.

Taken together, this pattern reveals a dual mandate trap in practice: PSUs are responding rationally to expectations of reliable fossil energy and strong fiscal contributions, yet this keeps their capital outlays concentrated in long-lived fossil fuel infrastructure. Over the medium term, it increases the risk of locking in a high-carbon trajectory, raising future transition costs for the public sector, and stranding assets as climate policies and trade measures tighten.

Diversifying India’s Energy Mix in a Volatile and Warming World

India’s energy system is still heavily dependent on imported fossil fuels. These fuels have underpinned economic growth and helped meet rising energy demand, but they also lock the country into a high-emissions development path at a time when global mitigation needs to accelerate. In FY 2025, India imported the vast majority of its crude oil and around half of its natural gas, and it still brought in large volumes of coal. These fossil flows sustain today’s growth model while pushing cumulative emissions higher, with direct consequences for India’s future climate risk.

The infographic below illustrates how India's PSUs are directly linked to energy security and how fossil fuel price volatility transmits into their accounts and into government finances. When global energy prices spiked in FY 2023, the impact was immediate and wide-ranging: excise duties on petrol and diesel were cut, while INR 22,000 crore (USD 2.7 billion) was paid to compensate oil PSU under-recoveries on LPG. Oil PSUs saw compressed profits, with lower corporate tax and dividends, while NTPC faced sharply higher variable costs as imported coal prices surged. Gradually shifting PSU investment toward non-fossil energy can reduce the volume of coal, oil, and gas that must be procured on volatile global markets—strengthening energy security while also lowering national emissions intensity.

A faster buildout of clean energy is therefore mainly about diversifying India’s energy mix and aligning it with a safer climate trajectory. Assessments by the Intergovernmental Panel on Climate Change and others show that South Asia (and India in particular) faces some of the world’s highest risks from additional warming, including more frequent deadly heat waves, intensified monsoon variability, and coastal and riverine flooding that threaten lives, labour productivity, and infrastructure. By accelerating the deployment of clean energy, PSUs can help limit future temperature increases and reduce the scale of climate impacts that would fall disproportionately on India’s citizens and economy. The case for clean energy in India thus rests on diversification of the energy mix, credibility in meeting international climate commitments, and long-run climate resilience, rather than on narrow claims about short-run generation costs.

Managing the Just Transition Challenge

Managing the social and economic consequences of coal phase-down will be one of India’s most complex transition challenges. The scale is significant: according to Niti Aayog’s recent report, over 150 districts across India are significantly dependent on fossil fuel supply chains, directly or indirectly sustaining livelihoods for nearly one-third of India’s population. Formal coal mine employment stands at around 345,000 workers, but when informal workers in mining and ancillary activities are included, over 1 million people depend directly on coal. When fossil-fuel-linked manufacturing sectors are included, such as textiles, basic metals, petroleum products, and chemicals, the total affected labour force reaches 16.9 million, the majority in the informal sector and therefore the most exposed to disruption.

Comprehensive just transition strategies for coal- and fossil fuel-dependent regions will need to be developed collaboratively by national and state governments, PSUs, affected workers, and communities. For each fossil fuel-intensive PSU, transition planning should include worker redeployment pathways with clear timelines, reskilling programs aligned with realistic employment opportunities, regional economic diversification initiatives for coal-dependent districts, and social safety nets for workers unable to transition. PSUs have a responsibility to map their workforce exposure, communicate transparently about the implications of different transition scenarios, and engage constructively in dialogue.

Four Policy Levers for Accelerating Just Energy Transition

India's concentration of energy production and distribution within PSUs creates conditions for rapid, coordinated decarbonization that fragmented, market-based systems cannot easily replicate. Because these enterprises share a public owner, the state can set common expectations, coordinate large investments across companies, and align planning horizons with national climate goals. The institutional capacity exists within these organizations. The financial resources are available through profitable operations and access to public finance. What remains is implementation coordinated across enterprises, accountable through governance mechanisms, transparent in execution, and adequate to the scale of transformation required to meet India's climate commitments while ensuring energy security and just transition for affected workers and communities.

Four critical policy interventions can accelerate SOE transition:

• Develop a Climate Mandate for Strategic PSUs
  The government could establish a formal mandate requiring each strategic PSU to align its corporate plans with India’s 2035 and 2070 climate goals, including periodic progress reporting on renewable deployment, fossil fuel emission management, energy efficiency and just transition, coordinated across ministries to ensure coherence and accountability.
• Integrate Climate Metrics into Performance Management
  Expand DPE's annual MoU framework to include mandatory climate key performance indicators covering emissions intensity reduction, renewable capacity additions, clean energy CapEx share, and just transition milestones. Climate performance should carry weight equivalent to financial metrics in evaluations.
• Create PSU-Specific Incentives for Clean Energy CapEx
  Introduce targeted fiscal and financial incentives, such as tax rebates, dividend flexibility, or preferential access to concessional finance for PSUs investing a defined share of their annual CapEx in clean energy, green hydrogen, storage, or efficiency.
• Develop Holistic Transition Plans for Fossil and Employment-Intensive Sectors 
  Each fossil fuel-intensive PSU should contribute to comprehensive transition plans led by state and national governments. These plans should map worker and asset exposure, outline credible asset phase-down scenarios, and identify realistic redeployment and reskilling pathways for affected workers and communities.

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Overview

India’s quantified energy subsidies were at least INR 4.3 lakh crore (USD 51 billion), or 2.3% of real GDP in financial year 2025 (FY 25). Of this, INR 2.9 lakh crore (USD 35 billion) (68%) was in the form of direct budgetary transfers, i.e., transfers straight out of government budgets, which are often the most visible and quantified form of subsidies.

With global energy markets under stress from geopolitical disruption and commodity price volatility amid the conflict in the Gulf, the composition of energy subsidies matters more than ever. As a major importer of oil, gas, and coal, India is particularly exposed to these dynamics: when public spending is heavily weighted toward imported fossil fuels, governments absorb price shocks directly through their budgets—tightening fiscal space for clean energy investment and social welfare.

This analysis is part of our series Mapping India’s Energy Policy. We draw on the latest Union Budget 2026-27 data from the Government of India presented on February 1, 2026 to highlight how electricity and fossil fuel subsidies are tightening the fiscal space for scaling clean energy, in the context of the current energy crisis.  

We observe three major trends. First, electricity consumption subsidies—provided by state governments—reached INR 2,40,992 crore (USD 28 billion) in FY 25 and contributed to nearly 58% of all energy subsidies. These subsidies have nearly doubled over the last decade as electrification became nearly universal in India. Second, among fossil fuel subsidies, liquefied petroleum gas (LPG) subsidies were the largest at INR 71,718 crore (USD 8.4 billion), accounting for 17% of all energy subsidies in FY 25, and are expected to grow in FY 26 and FY 27, due to continued exposure to global price volatility, as government absorbs price spikes during the current energy crisis (see cooking section for details). Third, clean energy subsidies for renewable energy and electric vehicles (EVs) represent 10% of total energy subsidies and are gradually expanding but remain vulnerable to global oil price shocks due to structural fiscal dependence on oil and gas revenues. 

Shifting public financial support—like subsidies—from fossil fuels to clean energy can accelerate the energy transition, with benefits for energy access, government budgets, and energy security. Over the past decade, India has expanded electricity access, scaled renewable energy capacity, supported cleaner cooking fuels and clean transportation. For policy-makers, the central challenge is not whether public resources should support the energy system—such support remains essential for affordability and development—but how to rebalance fiscal support to align with India’s medium and long-term energy transition goals while maintaining fiscal sustainability.

Power

Rising Electricity Subsidies in India Undermine Financial Viability of Utilities and Fiscal Space for the States

Electricity subsidies for end consumers are important welfare instruments, but are also a major financial burden for states that jeopardize spending on social welfare programs, the energy transition, and other government priorities. Electricity subsidies are aimed at largely benefiting domestic and agricultural consumers, who have low purchasing power in India. By 2022–23, electrification became near universal in India, and subsidies have grown with rising electricity consumption.

Evidence from state-level trends highlights that in the wake of the COVID-19 pandemic and rising cost of power procurement in 2022–23 (as shown in the figure below), state governments were quick to implement subsidy measures to support poor consumers. However, the subsidy per unit has continued to increase despite marginal reductions in average power purchase costs in 2023–24 and 2024-25. Electricity subsidies are now structurally embedded in state budgets, with growing costs limiting fiscal space.

After the COVID-19 pandemic, electricity subsidies as a share of state government revenues (which includes their own tax revenue, share in central taxes, and non-tax revenue) have increased in 20 states/Union Territories (UTs). In FY 25, five state – Punjab, Rajasthan, Andhra Pradesh, Karnataka, and Madhya Pradesh spent between 9% and 20% of their state revenues on electricity subsidies. This was partly due to more generous subsidy schemes. For example, the state with the highest share, Punjab (20%), had expanded subsidy coverage to domestic consumers (up to 300 units) since 2022, in addition to free electricity to agricultural consumers. In Karnataka, the launch of the state scheme Gruha Jyoti Yojana in August 2023, which subsidizes up to 200 units, has contributed to the state’s electricity subsidies increasing from INR 13,906 crore (USD 1.6 billion) to INR 27,725 crore (USD 3.2 billion) between FY 23 and FY 25. These volumetric cutoffs for electricity subsidy schemes are double to triple the monthly electricity consumption per household of approximately 103 units in FY 25, leading to questions about whether the schemes adequately target low-income consumers.

Eight states show a reduction of electricity subsidies as a share of state revenues, led by an absolute decline in subsidies or improved fiscal management, while Odisha and Arunachal Pradesh show no change. 

Distribution companies (discoms) have become increasingly reliant on timely subsidy reimbursements to maintain cash flows, and delays expose them to financial risks and increase short-term borrowing. In FY 25, tariff subsidies accounted for an average of 21% of discoms’ revenues (up from 17% in FY 21), with revenue from operations recovering around 70% of costs as shown in the figure below.

In FY 24, discoms were borrowing to cover operational expenditure: about 44%–86% of total borrowings by the discoms in eight Indian states is reported to have been for non-capital end-use, with interest expenses contributing to 5% of discoms’ annual expenses each year.

Between FY 19 and FY 25, dependence on tariff subsidy reimbursements for meeting discoms’ expenses increased in 23 states/UTs. In FY 25, this dependence rose to nearly 30% or above in seven states—Nagaland, Bihar, Mizoram, Rajasthan, Punjab, Madhya Pradesh, and Karnataka.

The Government of India introduced the Revamped Distribution Sector Scheme (RDSS) in 2021, a results-linked scheme to improve timely payments by state governments to discoms, among other things. This helped clear subsidy backlogs to some extent. Subsidies were paid on time in 10 states in FY 22 and 11 states in FY 23—out of the 12 states that accounted for 90% of the subsidy billed nationwide. 

Sufficient and regular tariff revisions are necessary to improve discom finances. Despite RDSS’s success in ensuring timely subsidy payments, there are minor delays resurfacing in eight states/UTs—Maharashtra, Punjab, Haryana, Delhi, Andhra Pradesh, Himachal Pradesh, Rajasthan and Uttarakhand in FY 25, indicating that capitalizing on RDSS’s success remains elusive. Maintaining consistent discipline in subsidy payments by state governments in future will be paramount to avoid building up a future subsidy backlog.

Renewable Energy Subsidies Offer a Pathway for Fiscal Reform 

Deploying renewable energy can cut power procurement costs and lower the ongoing subsidy burden. “Vanilla” solar and wind is already the cheapest form of electricity supply. Even grid-scale firm and dispatchable renewable energy (FDRE)—combining solar, wind, and storage to provide predictable power supply—at discovered tariffs between INR 4.76 and INR 4.77/kWh (~USD 0.053/kWh) is already cheaper than the average power procurement cost in 2024–25 (INR 5.38/kWh) as shown in the figure above) and new thermal. In addition, FDRE projects can be commissioned in around 2–2.5 years, compared to 5–7 years for new thermal capacity, enabling faster capacity addition and cost realization.

In fact, a recent analysis from Ember also finds that solar paired with battery storage can now economically meet up to 90% of India's electricity demand at a levelized cost of ~INR 5.06/kWh, already within or below average power procurement costs in most states. As procurement costs decline, the gap between the cost of supply and tariffs (which subsidies bridge) can narrow down even further.

At the distribution level, well-designed village-scale solar closer to demand can lower power procurement costs while reducing technical losses. Distributed renewable energy, when combined with energy storage, can also provide a variety of grid services, such as transmission and distribution congestion relief and system upgrade deferrals, although locational aspects may determine exact cost savings.  

On the demand side, solar irrigation and rooftop solar further reduce subsidy pressures. Agricultural electricity subsidies remain a major fiscal burden; solarization under PM-KUSUM replaces recurring subsidized supply with upfront capital investment. Rooftop solar under PM Surya Ghar similarly reduces household grid consumption and subsidy outlays. Across these pathways, the fiscal logic is consistent: shifting from recurring subsidies to one-time capital investment to lower supply costs and, over time, subsidy requirements.

Notably, the central government has been ramping up renewable energy subsidies over the last decade, peaking at INR 26,406 crore (USD 3 billion) in FY 25. Within these, decentralized renewable energy schemes, namely PM Surya Ghar and PM-KUSUM, spent INR 7,818 crore (USD 924 million) and INR 5,164 crore (USD 630 million) at the end of FY 25, respectively. Together, these two schemes account for 49% of all renewable energy subsidies in FY 25. However, spending has been low compared to budgetary allocations, indicating implementation challenges on the ground.

State governments should complement the centre’s subsidies with their own initiatives to speed up land identification and grid readiness for renewable energy integration. This could accelerate benefits for discoms (lower subsidy outlays) and consumers (improved electricity supply and lower air pollution), while delivering new jobs and regional economic development.  

Cooking

Clean Cooking: A vital form of support, but LPG exposes fiscal accounts to price shocks

India’s second largest energy subsidy is for LPG consumption through direct budgetary transfers, lower goods and service tax (GST), and price stabilization measures. In FY 25, total LPG support reached INR 71,718 crore (USD 8.4 billion), about ~17% of total energy subsidies, as shown in the figure below.

LPG remains central to clean cooking in India, but it is also a key channel through which global price volatility and supply chain vulnerability translate into domestic fiscal exposure and energy security risks, as 60% of India’s domestic LPG is imported. Recent conflicts in the Gulf have brought this dynamic into sharper focus. Temporary supply constraints along the Strait of Hormuz (a critical global energy chokepoint) tightened LPG availability and pushed up international prices, leading to an increase of INR 60 per 14.2 kg cylinder (USD 0.7 per 14.2 kg cylinder) on March 7, 2026 (an increase of 7%) for domestic consumers. The price shock reflects a long-standing structural challenge affecting households and public finances.

The Fiscal Burden

When global LPG prices rise, policy-makers face a difficult decision. They can pass through higher costs to households, which can undermine purchasing power for poor households and potentially push some to use more biomass (a major health risk). Or they can cap the retail prices, which cushions consumers in the short term but shifts the burden to oil marketing companies (OMCs) through under-recoveries, and eventually to government budgets due to lower revenues (and losses) for OMC and potential bailouts.

In FY 2024–25, OMCs incurred approximately INR 33,000 crore (USD 4 billion) in LPG under-recoveries, which is comparable to India’s annual budget allocation for the National Health Mission (~INR 39,000 crore, USD 4.6 billion). Further, these under-recoveries were more than twice the direct budgetary subsidies for all of government of India schemes supporting LPG, which stood at INR 14,179 crore (USD 1.7 billion) in FY 2024–25.

IISD’s analysis showed that cumulative LPG under-recoveries for OMCs had already exceeded INR 50,000 crore (USD 5.9 billion) by August 2025, prompting the Government of India to approve INR 30,000 crore (USD 3.5 billion) in compensation to OMCs. Periods of rising global LPG prices and rupee depreciation amplify this exposure.

Under-Recoveries and Fiscal Exposure Will Escalate With Global LPG Price Increases

Our analysis shows how quickly fiscal exposure can escalate when global LPG prices rise. Saudi Aramco LPG benchmark prices, which are the widely accepted benchmark for LPG exports from the Middle East to the Asia-Pacific region, increased by ~44% between March and April 2026. If this level persists, and domestic prices remain at INR 913 per refill (USD 10.7 per refill), our forward projections indicate that India’s annual LPG under-recoveries could exceed INR 60,000 crore (USD 7 billion) in FY 2026–27, as shown in the figure below.

Even if global LPG prices rise moderately from pre-crisis February 2026 levels, the fiscal exposure remains substantial. For instance, annual under-recoveries could reach approximately INR 26,000 crore (USD 3 billion) (with a 10% increase) and INR 48,000 crore (USD 5.6 billion) (with a 30% increase) in FY 2026–27, suggesting that OMCs may need another bailout in the current fiscal year.

Short-Term Responses and Their Limits

The Government of India responded to recent supply disruptions by boosting domestic LPG production, diversifying imports, and mandating a shift to piped natural gas (PNG) in areas with existing pipeline infrastructure, accelerating the expansion of PNG connections.

While shifting demand to PNG can help reallocate LPG to households without pipeline access, it does not address the core challenge of import dependence, as India continues to rely heavily on imported natural gas. Expanding PNG for cooking locks in long-lived infrastructure and continued fiscal exposure, potentially diverting resources from cleaner and more durable transition pathways such as electrification. Infrastructure for electric cooking also supports cooling, EVs, heating, lighting, and many other end-uses, whereas PNG is used only for cooking and heating and therefore risks becoming a stranded asset.

The Case for a Diversified Clean Cooking Basket

A durable response requires diversifying the clean cooking energy mix, maintaining LPG and PNG where needed, while systematically scaling up viable non-fossil alternatives. For instance, in urban areas, electric cooking is already cost-competitive. Following the recent LPG price increase, households will need to spend around 20% less by shifting to electricity. As electricity is domestically produced, wider adoption can reduce import dependence. IISD analysis indicates that large-scale uptake could halve LPG import demand and generate subsidy savings of up to INR 2.4 trillion (USD 28 billion) by 2050.

Similarly, in rural areas, decentralized biogas offers a locally produced alternative where feedstock is available, with no recurring fuel costs. Unlike recurring LPG subsidies, biogas support is largely capital intensive but fiscally sustainable over time.

Transport

Conflict in the Gulf, affordability concerns, and the need for price stabilization measures bring another challenge for India: declining energy revenues. India’s energy revenues, including centre and states, were nearly INR 10 lakh crore (USD 118 billion) in FY 25 (14% of all government revenue) and declined marginally from a peak of INR 11 lakh crore (USD 130 billion) in FY 22 on a real basis. The high reliance of the government on fossil tax revenues—especially oil and gas (at 11%)—across centre and states exposes the government’s fiscal base to energy price volatility and underscores the need to diversify revenue streams, lest fiscal dependence becomes a reason to slow the energy transition.

Excise Duty Cuts: An understandable but costly intervention

Since the conflict in the Gulf, international crude oil prices surged from ~USD 66 per barrel on February 26, 2026, to ~USD 113 per barrel by April 7, 2026, a near 75% increase in 6 weeks. Prior to any policy response, under-recoveries stood at approximately INR 26 per litre (USD 0.3 per litre) on petrol and INR 82 per litre (USD 0.9 per litre) on diesel, with OMCs absorbing a combined daily under-recovery of approximately INR 2,400 crore (USD 280 million), while keeping retail prices frozen.

On March 27, 2026, the Government of India reduced excise duty by INR 10 per litre (USD 0.12 per litre) on petrol and diesel to partially offset OMC under-recoveries. The fiscal cost of this intervention is substantial. If the current duty structure is maintained through FY27, revenue losses will reach an estimated INR 1.3 lakh crore (USD 15 billion) (0.4% of GDP), on top of other subsidy pressures.

Prolonged price suppression on transport fuels creates policy trade-offs. Maintaining reduced excise duties could weaken price signals that encourage fuel efficiency, shifts toward lower-emission transport options (such as from private vehicles to public or shared transport), and incentives for consumers to take up EVs, while limiting fiscal space for governments to scale up clean mobility and public transport.

Abrupt price pass-throughs could generate short-term macroeconomic pressures. As international crude prices stabilize, a phased and calibrated pass-through, beginning with petrol and then with diesel, would ease the burden on the exchequer while limiting welfare impacts on lower-income households. Gradually rebuilding revenues while scaling investments in clean mobility and electrification would reduce exposure to future oil price shocks and better align crisis responses with long-term transition priorities.

The conflict in the Gulf offers an opportunity for oil-importing countries such as India to accelerate EV adoption and reduce exposure to volatile and geopolitically risky imports. India has established a strong policy architecture for promoting EVs, with central subsidies reaching INR 16,812 crore (USD 2 billion) or one-fifth of quantified oil and gas subsidies in FY 25. This includes GST concessions, demand incentives, and production-linked incentives for domestic manufacturing. However, sustaining the ambition will require a clear resource mobilization strategy to ensure continued EV support until adoption reaches critical mass. At such a time, road user charges or similar measures will be needed to replace fuel tax revenues with EV revenues.