Why shielding consumers from rising fuel prices can backfire

IOC, BPCL, and HPCL have lost about Rs 20,000 crore due to the fuel price freeze. These losses will accumulate on balance sheets, raise borrowing costs, and circle back to the govt as contingent liabilities.

31 March, 2026
The Print

Brent crude has surged toward $120 a barrel since the US-Israeli strikes on Iran began, with analysts warning of the price reaching $150 or more if the conflict persists. Natural gas prices in Asia and Europe have risen 54 per cent and 63 per cent, respectively, in the week following the opening strikes. Jet fuel has surged $200 per barrel, diesel almost $180 per barrel.

When supply falls sharply and demand does not, a rise in prices is the obvious response in a market economy. This was Europe’s experience in 2022 — it let prices rise, taxed firms that profited, and undertook some redistribution. In India, petrol and diesel prices have barely moved.

The government has held the line absorbing the difference through oil marketing companies and implicit fiscal transfers. This begs the question: is shielding consumers from price signals actually protecting them, or is it simply deferring the cost, distorting the market, and ultimately leaving them worse off?

When a supply shock hits

It is worth beginning with first principles. When a supply shock hits, and less of the commodity is available, consumers need to reduce their consumption, producers need to find ways to bring more of the scarce good to market. These millions of individual decisions get coordinated through the price.

Consider a simple example: When onion prices spike, you do not need a government advisory telling you to use fewer onions. You substitute, and reserve onions for the dishes where nothing else will do. A trader somewhere calculates that the higher domestic price now makes importing viable. Supply rises, demand compresses, and the market finds a new equilibrium. This takes time, and there is hardship and chaos in the short run. But this actually leads to coordination of millions of independent decisions, each responding to the price, which produces an outcome that no allocation committee could have implemented.

When oil prices rise, this is exactly the mechanism that would play out. On the demand side, it will lead to adjustments that preserve supply. For example, households may undertake lesser travel, industry may switch fuels, and make efficiency investments. On the supply side, every alternative starts to look more viable, drawing in investments and innovation, which had earlier seemed too costly.

The arguments against price rises

If the case for allowing prices to rise is this straightforward, why does the Indian state reflexively reach for the price cap? Two arguments are typically made. Let us consider each.

The first argument runs as follows: the poor spend a disproportionate share of their income on energy, and allowing prices to rise unchecked is effectively taxing those least able to pay. However, when governments suppress fuel prices, the poor do not benefit disproportionately. Fuel subsidies in practice flow overwhelmingly to the middle class and the wealthy, who own more vehicles, consume more diesel, and run larger businesses. A flat price cap is a subsidy to everyone, but a larger subsidy in absolute terms is to the affluent. Further, since the supply shock remains, scarcity manifests itself in long queues, in rationed allocations, and in the black market price that the poor, with no connections to help jump the queue, ultimately end up paying.

The second argument places the blame for rising prices on speculators. It suggests that prices are not rising because oil is genuinely scarcer, but because speculators are hoarding the oil, or trading on futures markets, and artificially inflating them. However, a speculator who bets on rising prices and is correct is actually providing early information that allows consumers and businesses to adjust sooner. Capping prices to punish speculators destroys this information, leaving the market blind, precisely when it most needs to see. Suppose the argument is physical hoarding.

But hoarding is profitable up to a point. Storage costs money, oil degrades, and the hoarder’s entire bet depends on selling before prices reverse. So if prices were to rise, they would actually discipline the hoarder. Capped prices not only eliminate the profit opportunity that would induce the release of stocks, but also the signal that would have drawn in competing supply.

Impact on oil firms

If international prices have risen, and retail prices are not reflecting that increase, who is bearing the brunt? The major cost is being borne by India’s state-owned oil marketing companies, with their marketing margins turning negative owing to the rise in international prices. Reports suggest that IOC, BPCL, and HPCL have lost about $2.25 billion (about Rs 20,000 crore) due to the fuel price freeze. These losses will accumulate on balance sheets, raise borrowing costs, and ultimately circle back to the government as contingent liabilities. The government recently slashed the Special Additional Excise Duty (SAED) on petrol and diesel by Rs 10 per litre each, with the intention of keeping the retail price in check. This gives some relief to the oil companies, but takes away the government’s spending kitty, which will probably have to be made up by increasing other taxes.

A supply shock, not of our making, is upon us. When a supply of say 100 units goes down to 60 units, there is always the question of who gets the supply? The choice is whether this allocation happens through prices, which distribute the burden across millions of decisions simultaneously, or through the state, which leads to fiscal stress, balance sheet deterioration, and eventual crisis. The gains to GDP are greater with adjustments through the price system.

Now is India’s chance to reform its electricity system—utilise the energy crisis

India’s states have vastly different electricity needs. Tamil Nadu has high wind penetration and Rajasthan has abundant solar irradiance. A one-size-fits-all procurement template cannot work.

17 March, 2026
The Print

The US-Israel strikes on Iran have triggered a serious energy crisis for India, which imports more than 85 per cent of its crude oil, and about 50 per cent of its natural gas. Brent crude has surged past $100 a barrel, and the Strait of Hormuz — through which over half of India’s crude imports and most of its LPG transit — is effectively closed to commercial shipping. The government has rationed gas supplies to hotels and restaurants.

While we would have preferred to avoid this crisis, policymakers should use this opportunity to initiate systemic reforms to accelerate India’s energy transition. Getting there requires five reforms in India’s electricity system.

Free the price system

India has a long history of controlling energy prices. Petrol and diesel prices have been frozen for extended periods whenever global crude prices rise, as they have right now. The instinct is to shield consumers from price shocks.

Similarly, India’s electricity sector is riddled with price distortions. Agriculture and domestic consumers are heavily subsidised, while commercial and industrial (C&I) users pay inflated tariffs. Costs do not disappear because the government chooses not to pass them on. They show up in the balance sheets of oil companies, ballooning discom losses, deferred infrastructure investment, low innovation, and fiscal deficits—ultimately financed by the very consumers the freeze (or the subsidy) was meant to protect.

More importantly, in the long term, real-time, cost-reflective tariffs are essential for a renewables-heavy grid. When the sun is shining, there is abundant solar power and electricity is cheap to produce. In the evening, when solar generation fades and demand peaks, expensive coal plants kick in and the cost of supply jumps. If prices reflected this variation in real time, demand would adjust.

For example, factories would shift energy-intensive processes to cheaper solar hours, EVs would be charged during the day, and households could shift several chores to daytime. Demand-side adjustments can help make the transition to renewables cheaper and faster. We have almost none of these today.

Free power purchase agreements from price rigidity

When a company builds a solar or wind farm, it needs a buyer for the electricity it will produce. In India, this is overwhelmingly a state-owned distribution company — the entity that delivers power to your home and factory. The two sides sign a power purchase agreement, or PPA: a long-term contract, often lasting 25 years, in which the buyer commits to purchasing electricity at a fixed price determined through an auction.

But this creates a problem. Technology costs and other inputs, interest rates, and grid conditions change. A price locked in in 2025 may look absurd by 2030. Yet, the distribution company is stuck buying at a price that may be far above what the market offers if costs fall.

These contracts need to be more flexible—allowing prices to adjust periodically to reflect market conditions, indexing them to costs that actually change, and giving both parties room to respond to a world that will look very different in a decade.

Free contracting from the one-size-fits-all template

When a state government wants to buy renewable energy for its people, it does not have the freedom to design an auction that suits its needs. The Union government prescribes standard bidding guidelines that all states must follow — specifying how auctions are conducted, how tariffs are structured, and what contractual terms are permissible.

Deviations from these guidelines must clear the hurdle of regulatory approval, which takes time and carries costs. But India’s states have vastly different electricity needs. Tamil Nadu has high wind penetration and an ageing thermal fleet; Rajasthan has abundant solar irradiance and cheap land. A one-size-fits-all procurement template cannot accommodate these differences. States should have the freedom to innovate in how they buy power.

Free buyers and sellers to trade with each other

Under current law, anyone who wants to buy and sell electricity needs a trading licence from the government. This rule was written two decades ago, when electricity trading meant large deals between state utilities — not the kind of small, flexible transactions that renewable energy makes possible today.

Imagine a factory with rooftop solar panels that generates more power than it needs at midday. It should be able to sell its excess generation to a trader who aggregates such surpluses and sells them to a neighbouring IT campus. Or a housing colony should be able to buy solar power from a generator and supply it to households within the colony.

A regulatory framework that allows small buyers and sellers—as well as intermediaries who facilitate such transactions—to transact directly, without needing a trading licence, would unlock entirely new markets for clean energy. More buyers and sellers would mean better price discovery, which in turn would signal investors where to build the next solar farm or battery storage facility.

Free the market for storage

Solar and wind are intermittent sources of energy— they generate when the sun shines and the wind blows, not necessarily when demand peaks. For renewables to provide reliable, round-the-clock power, large-scale energy storage is essential.

India’s current policy approach to storage is to bundle it with generation through firm and dispatchable renewable energy (FDRE) contracts, where a single developer must build both the renewable generation plant and the storage facility, and guarantee delivery at specified hours. This forces a vertically integrated model on what should be a competitive, unbundled market.

A far better approach would be to let storage emerge as an independent business. Standalone storage operators should be free to buy cheap solar power during the day — when prices should fall to near zero — store it, and sell it during evening and night hours when demand peaks and prices are high. This arbitrage is the natural business model for storage. It requires no subsidy, only a functioning price system, and would also be helped by removing the requirement for a trading license. The price spread between solar hours and peak hours is the revenue model.

Unbundling storage from generation, and allowing storage-only players to trade freely on energy exchanges would unlock private investment in batteries, pumped hydro, and other storage technologies far more effectively than any government mandate.

When Russia cut off gas supplies to Europe, there was a painful price surge. On the demand side, households and factories cut consumption, switched fuels, and invested in insulation and efficiency. On the supply side, LNG terminals were fast-tracked, renewable installations accelerated, and alternative suppliers rushed to fill the gap. Within 18 months, European gas prices had fallen back.

The price system was brutal in the short run but self-correcting — precisely because no government tried to freeze it. India should use the current crisis to extend the freedom of price movement to the energy sector. This should, in turn, be followed by the freedom to contract flexibly, the freedom to trade power across buyers and sellers, the freedom to build storage as a business, and the freedom for states to design their own path.

Why RBI’s draft rules aren’t enough to curb mis-selling of financial products

For too long, sales misconduct has been treated as an operational issue created by overzealous relationship managers. The elevation of the issue to the board level signifies that mis-selling is a governance failure.

03 March, 2026
The Print

Most of us have likely experienced a bank relationship manager encouraging us to buy insurance policies, mutual funds, and other products that we did not need, and definitely did not understand. The RBI has finally issued draft directions to curb the mis-selling of financial products. This is a welcome step, which was long over-due. The process of reform tells us two things — first that reform takes a long time, and is shaped by research, advocacy, and engaging with the government. Second, the process has just begun, draft directions have to become final, provide more clarity on enforcement, and then have to actually get implemented.

Until recently, while the RBI acknowledged mis-selling by bank staff, it considered it to be someone else’s problem. This has fundamentally changed. The draft directions under the Responsible Business Conduct framework, applicable to commercial banks, NBFCs, regional rural banks, cooperative banks, and all-India financial institutions, define mis-selling as follows, “…if it sells something unsuitable for the customer’s profile, provides misleading or incomplete information, completes a sale without explicit consent, or bundles additional products with a requested service.” This brings about some notable changes.

First, there is now a definition of what constitutes mis-selling. Products have to be “suitable” for the customer’s profile. For example, banks should now have to think twice before selling a life insurance policy to an 80–year–old person. Second, compulsory bundling — the purchase of one product made conditional on the purchase of another — is now prohibited. For example, several banks were making a loan conditional on buying an insurance policy. This will now not be allowed. Third, misleading practices such as “dark patterns”, “trick wording”, and “subscription traps” are also prohibited. Banks must now carry out suitability assessments before selling a product and must seek customer feedback within 30 days of a sale. Finally, the framework introduces post–sale safeguards. Besides seeking feedback, banks must also put in place structured monitoring and reporting systems. If mis-selling is established, the bank must refund the full amount and compensate the customer.

Importantly, the draft places primary responsibility for designing, approving, and overseeing compliance with these requirements squarely on the boards of regulated entities. Policies on suitability, sales practices, incentives, grievance redress, and monitoring must be board-approved, and boards are expected to exercise ongoing oversight.

The theory of change: data, research, and advocacy

How did we get here? This journey has involved three elements: data and research to establish the scale of the problem, advocacy to build a narrative for reform, and government engagement to translate evidence into policy.

The research trail goes back over a decade. In 2014, a research paper estimated that Indian policyholders lost approximately $28 billion between 2004 and 2011 on account of mis-sold life insurance products. The number put a rupee value on a problem that most people experienced anecdotally. A mystery shopping study of bank branches in Delhi, where auditors posed as customers seeking tax-saving instruments, found that private sector banks overwhelmingly recommended the high–commission product, typically an insurance policy, while public sector banks pushed fixed deposits to meet their own mobilisation targets. Banks rarely made voluntary disclosures on product features, costs, or risks. In 30 per cent of the cases, market-linked insurance products were falsely presented as carrying guaranteed returns. Research has also shown that agents systematically recommended products that earned them the highest commissions rather than those that best served the customer. Running alongside the research was sustained advocacy by journalists and commentators.

This body of evidence fed into government engagement. In November 2014, the Ministry of Finance constituted the Sumit Bose Committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products. The Committee’s report, released in September 2015, identified the core problem: financial products were regulated by multiple regulators who did not coordinate strategies, the sales channel faced different incentive structures for identical products, disclosures were opaque, returns were not comparable, and costs were hidden. The Committee recommended, among other things, ending the practice of front-loaded commissions that created perverse incentives to push high–cost products. Finally, the RBI’s Report on Trend and Progress of Banking in India 2024-25 stated that mis-selling has significant consequences for customers and the financial sector, and that it would issue comprehensive instructions to curb such mis-selling.

Why this is not enough, and what must happen next

It is unquestionably a positive development that the ultimate responsibility for preventing mis-selling has been placed on bank boards. For too long, sales misconduct has been treated as an operational issue created by overzealous relationship managers, or poorly trained agents. The elevation of the issue to the board level signifies that mis-selling is a governance failure.

Placing the entire responsibility on boards has trade-offs. On the one hand, as Monika Halan has observed, this might mean that suitability and other requirements remain as boxes to be checked. Along similar lines, others have argued that the effectiveness of these reforms depends on defining key concepts such as “suitability” and creating robust consumer-feedback mechanisms.

On the other hand, if the RBI were to turn every aspect of customer protection into law with exacting standards, there would be little room for banks to interpret requirements differently. A highly prescriptive legislation can constrain flexibility. The next piece of the puzzle, therefore, is the question of incentives and enforcement. Unless bad behaviour is costly, firms will not redesign their incentive structures, and this may leave us exactly where we were before the directions.

This is where the role of data and research becomes even more important going forward. We need continuous and rigorous monitoring of whether the new rules are actually changing behaviour on the ground. We also need data on outcomes: are customers being sold more suitable products? Have refunds and compensation claims risen? Are banks restructuring their internal incentive frameworks? Without this evidence, we will not know whether the directions are working.

The journey from research to regulation is long and uncertain. We are at a point where the central bank has acknowledged the problem and proposed a framework. The next step is to ensure that the framework is robust, that it is enforced, and that we continue to generate the data and research that will keep the pressure for reform alive.