Why petrol prices in India are higher than in Pakistan, Bangladesh and unlikely to fall soon

By: Shantanu Bhattacharji

India’s fuel prices are driven by a complex tax structure, with central and state levies making up nearly 60% of pump prices. Combined with a weakening rupee and over 85% crude import dependence, this leaves consumers facing a heavy fuel burden.

With petrol prices averaging Rs 101 per litre, India remains one of the most expensive countries for fuel in South Asia—exerting mounting pressure on household budgets already stretched by persistent inflation. For commuters, small businesses, and middle-income families, rising fuel costs are eating into disposable incomes and denting consumer confidence.

As of July 2025, India’s petrol prices far outstrip those in neighbouring countries: Rs 85 per litre in Bangladesh and Rs 80.40 in Pakistan. Even in wealthier economies, fuel remains cheaper—averaging Rs 79.40 in the US and Rs 94.50 in China.

This price disparity isn’t simply a function of global crude markets. India’s fuel prices are shaped by a layered tax structure, where central and state duties account for nearly 60 per cent of what consumers pay at the pump. Add to that a weakening rupee and heavy import reliance—India imports more than 85 per cent of its crude—and the result is an inflated fuel burden for consumers.

What’s more, international oil prices have softened significantly since their 2022 peaks. Yet Indian pump prices have remained elevated, largely because fuel taxation remains a critical source of government revenue. That disconnect has become a growing source of frustration, especially for lower- and middle-income households who bear the brunt of rising costs.

Central excise duties and state value-added tax (VAT) make up the bulk of the retail price. For every Rs 100 spent at the pump, more than Rs 50 goes to the government. In comparison, neighbouring countries like Bangladesh and Sri Lanka levy lower fuel taxes, and Pakistan often subsidises pump prices to limit public backlash.

India deregulated petrol prices in 2010, linking them to global oil markets. But in practice, retail prices remain heavily influenced by fiscal policy. Crude prices may fall, but the tax burden has stayed high—especially after the Covid-19 pandemic widened fiscal deficits and increased the government’s dependence on fuel taxes as a revenue source.

More significantly, the issue is further complicated by the country’s federal structure. Because petrol and diesel are excluded from the Goods and Services Tax (GST), each state has the power to set its own VAT rate. The result is wide regional disparities in prices, with some states charging far more than others.

India imports over 85 per cent of its crude oil, exposing it to global price swings and exchange rate risks. While the rupee has remained relatively stable in recent months, any depreciation makes imported oil more expensive, raising the base price for refiners and consumers.

In contrast, some smaller South Asian economies have adopted different strategies. Nepal, which imports its fuel directly from India, largely mirrors Indian price trends but doesn’t double down with its own high taxes. Sri Lanka, navigating fiscal reforms under an IMF programme, maintains moderate fuel taxes while using a flexible pricing mechanism to avoid volatility.

Pakistan, on the other hand, often leans on subsidies to placate voters. While that may temporarily ease household fuel burdens, it comes at the cost of long-term sustainability. Delays in payments to foreign suppliers have resulted in periodic fuel shortages, long queues, and a thriving black market. India’s system, for all its high costs, has ensured a stable and uninterrupted fuel supply.

The trade-off is clear: Indian consumers pay more, but they don’t face shortages or sudden rationing. Still, with global oil prices once again showing signs of volatility and a new round of geopolitical tensions brewing in the Middle East, the country’s fuel pricing structure will remain under scrutiny.

The high petrol prices are less about oil and more about politics. By keeping taxes high, the Centre ensures it has steady income and avoids the kind of fuel shortages that often hit its neighbours.

However, there’s a cost. High fuel prices are squeezing household budgets, especially for the middle class and small businesses. When people spend more on fuel, they spend less elsewhere—slowing the broader economy.

This strategy may be smart in the short term, especially with tensions brewing in the Middle East. But it can’t last forever.

Analysts say if New Delhi wants to fix this in the long run, it needs to make fuel taxes more predictable. One solution: bring petrol and diesel under the GST, so taxes are uniform and more transparent. That could lower prices without wrecking the government’s finances.