Taking Stock: The True Cost of India's Energy Crisis

In the past four months, India’s energy sector has lived through a stress test. The country was getting 40% of its oil imports through the Strait of Hormuz. In addition, it sourced over 50% of its oil, 60% of its LNG, and 80% of its LPG from West Asia. 

On February 28, when the US and Israel attacked Iran, the country lost access to these supplies. In the weeks and months that followed, as global markets for oil and gas tightened, India (like the rest of the world) also faced both shortages and price spikes in oil, gas and their industrial derivatives.

Strangely, despite the magnitude of the disruption, its full economic and social costs have remained unknown. One reason has to do with the NDA government’s response. And another, with India’s newsrooms.

“The Hormuz closure demonstrated the usual strategy of crisis management by the government,” an energy researcher at an influential Delhi-based thinktank told CarbonCopy. “Fuels were moved from industries to voters (households) which will affect the competitiveness of many industries. Crisis adjustment was essentially devolved to end-users (mostly the poor and lower middle class) through forced substitution and demand destruction.”

LPG is an illustration. Here, middle-class customers were protected even as supplies to unregistered and commercial users were abruptly shuttered. 

Most of the resulting travails, however, went unnoticed. Given the centrality of energy to the functioning of society, newsrooms needed to fan out across the country and track the energy crisis from week to week. This didn’t happen. And so, even compared to demonetisation, the botched rollout of GST or Covid-19, Indian newsrooms’ coverage of the energy shock was neither comprehensive nor sustained. 

And yet, India needs to reckon with the costs. The country, like much of the world, stands at a crossroads today. If the peace deal holds, it has to contend with its current set of losses. If it frays, worse times lie ahead. 

A reckoning with economic and social costs

By March 3, as Iran expanded the war to include oil infrastructure in the Gulf, firms like Qatar Petroleum, which supplies natural gas to India, had stopped production. Ship traffic through Hormuz had stopped as well.

The first-order effects were quick to reach India. Within two days, Petronet LNG declared Force Majeure on gas supplies; GAIL began warning customers about supply troubles; Adani Total Gas tripled its prices; and Gujarat Gas began cutting gas supply to industrial customers. Another day later, citing supply shortages, state-owned Mangalore Refinery and Petrochemicals began shutting parts of its refinery. 

Another two days later, India hiked the price of commercial LPG (by ₹115) and domestic LPG (by ₹60). It also told refineries to crank out as much LPG as possible — and hiked the LPG booking gap from 21 days to 25 days. The very next day, it halted all commercial LPG supplies, directing available LPG only to domestic users. This was the first sign that the country was sailing into uncharted waters.

What follows is a short account of the second, third and fourth order effects that followed (For a more granular, day-by-day account, see the weekly bulletins from #169 onwards of Energy Trends, our weekly newsletter on climate, energy and India).

By March 10, panic buying had begun. Black market rates for LPG cylinders quadrupled to ₹3,500-₹4,000. With the government keeping LPG cylinder prices low for registered users (state elections were looming), the gap between the real price and the suppressed (official) triggered a boom in illegal refilling of gas cylinders. Aided by rumours and local stockouts, India began to see periodic bouts of panic queuing at petrol pumps. Apart from these, with commercial LPG supplies grinding to a halt, units in industrial clusters like Morbi began shuttering.

Along the way, trapped between rising LPG prices and joblessness, migrant workers started heading back home. Citing high energy costs amongst his reasons for financial distress, a hotel owner killed himself in Belagavi.

Within 20 days, production of plastics and polymers — both made from petroleum — had dropped by 40% as well. With that, packaged goods manufacturers began raising prices. "The price of packaged drinking water has risen to 20 rupees per litre, due to a significant increase in packaging material costs, which have surged by over 70% in the last fortnight," Angelo George, CEO of Bisleri, told Reuters.

In the days and weeks that followed, these costs snowballed across India. More industrial clusters followed in Morbi’s footsteps. Dainik Bhaskar reported as many as 5,600 factories in MP are on the verge of closure. The government’s decision to halt all commercial LPG supplies choked the production of a key solvent (isopropyl alcohol) — and triggered a pharma crisis. 

By the end of April, diesel shortages emerged as another source of pain. Two months into the war, nearly 20% of India’s trucks were off the road. With that, market supplies fell and India’s households found food prices rising. Take Korba in Chhattisgarh. “In just 15 days, prices have increased from ₹15 per kg to nearly ₹40–50 per kg due to supply disruptions after the local tomato crop ended,” reported CG Khabar. These prices didn’t cascade back to farmers. Instead, with vegetables not being ferried to markets, they incurred losses. If anything, given shortages in both fertiliser and diesel, their kharif crop slipped into trouble.

Industry was affected as well. In Korba, iron ore shipments fell, affecting industrial production. Consumer durable and FMCG companies, too, began struggling to dispatch goods. Between lower demand and sales, Indian firms were hit, too. Net profits at the Nifty50, for instance, are expected to grow by just 4.2%, compared to 10% in the previous quarter. This, mind you, is big companies. Turn to MSMEs and the picture is grimmer. Their loan defaults rose.

As prices rose and the job market worsened, consumers felt the heat, too.“Lower-income households are cutting back under pressure from essentials inflation, while higher-income consumers are turning more cautious on expectations despite stable current incomes—together pointing to a broad-based but uneven cooling in demand,” wrote Mint.

As the NDA tried to stem the shortfall, India’s import bill soared. It managed to push natural gas supply to fertiliser plants to 75-80% of their requirement — up from 60% when the war started. Much of this, however, came through spot buys at about $19.5/mBtu (up 70% from $11-$12/mBtu before the war started)— and will result in cutbacks elsewhere. 

All costs, however, cannot be quantified. In Pune, frequent power outages and restrictions on diesel supply in portable cans have placed several small- and medium-sized private hospitals under severe strain. “In a recent incident, a private hospital conducting surgery nearly ran out of diesel for its backup generator,” reported Mid-Day. “While doctors continued the procedure, staff rushed to arrange fuel.”

As households devised their own coping mechanisms, the country faced other challenges. The LPG crunch, for instance, revived the firewood economy. As prices rose here, touching ₹8,000 for a tonne of firewood, India saw accelerated logging in outside and inside protected areas. In Madhya Pradesh, villagers began collecting firewood from forests. Similarly, the country saw the price of kerosene jump from ₹63/litre to ₹110 in Bangalore; Coal prices rise from ₹40/kilo to ₹60/kilo in Delhi; one could go on.

It also stared at, as described above, fertiliser and industrial feedstock shortages.

A question of resilience

Take a closer look at these developments and you will see a larger question. 

More than even currency, energy is integral to the functioning of any society or country. And yet, despite the energy shock, India (somehow) continued to function. 

What explains this resilience? Riding on renewables and coal, India’s power grid remained more or less unaffected by the energy shock. “This conflict seems to be a turning point, where the Indian electrostate became more important than the petrostate,” said Rohit Chandra, a professor of public policy at IIT Delhi. “As oil and gas supply lines were disrupted, domestic power generation from various sources filled all of those gaps; induction-based cooking, EVs, industrial processes, household consumption all were more resilient because the power grid remained reliable during this period. Even 10-15 years ago this would not have been true.”

Within oil and gas, much of the shock was absorbed by state-owned oilcos. ICRA, for instance, pegged OMCs’ losses at ₹18/litre on diesel and ₹14/litre on petrol. On LPG, its calculations pegged their losses at about ₹80,000 crore. According to Crisil, the three state-run retailers incurred net under-recoveries of Rs 40,000-45,000 crore. “As the Iran war disrupted crude trade routes and raised concerns over supplies through the Strait of Hormuz, India's state refiners rapidly reconfigured operations,” wrote Economic Times. “They increased LPG production by diverting refinery streams away from petrochemicals, diversified crude procurement across geographies, optimised refinery runs based on available feedstock and coordinated fuel supplies nationwide to avoid local shortages.”

In contrast, private refineries didn’t absorb much of the shock. Even as the crisis was snowballing, Nayara decided to close its Indian refinery for maintenance. And then, there is Reliance. It capped sales at its gas stations at $11 per visit. That is ₹1,000. “India’s oil sector holding up broadly against the impact of the Iran war is largely due to the resilience of oil PSUs,” said former Petroleum secretary Vivek Rae. “They have a wide and complex network of pipelines, refineries, tanks and are highly professional. It boils down to a strong governance structure which delivers during crises and which many countries don’t have.”

A third source of resilience was the consumer. When the NDA cut off LPG supplies to unregistered users, they found themselves paying international rates for LPG. With that, urban customers switched to induction stoves or headed back home. In rural areas, they fell back on cowdung and coal.

Apart from these, a fourth source of resilience was the informal economy. Even as the NDA turned its back on unregistered users, India’s unorganised sector began matching available supply to demand.

A catch operates here. Each of these forms of resilience, or the capacity of a  system to absorb an external shock and carry on, comes with limits. 

If the crisis runs longer, more Indians will fall back on electrification for cooking and mobility, putting the grid under strain. Similarly, at some point, India’s state-owned oilcos will find it impossible to subsidise users any further. As things stand, they have already taken a beating. “The negative margins of oil marketing companies will affect their profitability,” said the energy researcher. “The effect may last for over one or two years provided prices do not escalate again.”

Even consumers’ decision to fall back on alternatives to LPG doesn’t indicate robustness in the face of external shocks. “This is a regressive form of resilience, where households and small enterprises reverted to biomass or other non-commercial fuels, and non-essential consumption was curtailed,” said the researcher. “Distress migration showed the invisible costs of energy insecurity, where elevated energy costs eroded real incomes and employment, prompting labour displacement as an involuntary adaptive response.”

As for the informal economy, if supplies stayed scant, as CarbonCopy wrote in May, it too would have pivoted from poorer customers to richer ones.

“India is resilient enough to surmount short-term energy curtailments, but not resilient against a prolonged supply disruption,” said TK Arun, the editor of Economic & Political Weekly. “Cooking gas had to be rationed, forcing the urban poor to flee the city and commercial establishments to shut shop or curtail cooking. Those who had access to piped natural gas continued to get gas, only because allocation to fertiliser production had been cut — sowing was still in the future, and so fertiliser production could be postponed. Still, there would be a shortage, which the system would tolerate.”

In other words, the country is not out of the woods yet. As this article gets written, tensions have again flared in the Gulf. The ceasefire will, though, probably hold. Barring Israel, appetite for conflict is fast declining in both the US and Iran.

Even so, the after-effects of the conflict will be felt in the coming months and years. “The first thing to remember is that the actual oil/gas shock will only begin now,” said economist Jayati Ghosh. “Like most countries, India has been relying on existing stocks and reserves in the hope that the Hormuz closure will not last long. Even if the Strait of Hormuz opens completely tomorrow, which seems unlikely, it is likely to take around 5-6 months before the previous level of traffic can be resumed. So the actual shortages are going to be felt from now on, because India, like many other countries, is likely to have run down its reserves.” 

If shortages deepen, inflation will rise. As things stand, the Reserve Bank of India has already raised India's expected retail inflation in the quarter ending December 2026 to 5.9%, citing heightened global uncertainty, potential supply-chain disruptions, commodity price shocks, uncertainty surrounding the spatial and temporal distribution of the southwest monsoon, and the possibility of El Niño conditions. The long tail of the conflict is another variable here. 

Does India have enough spare resilience to withstand those shocks? “So far, the impact has been dispersed, with the worst effects faced by informal non-agricultural producers (such as the denial of LPG cylinders for "commercial use" which affected micro-entrepreneurs and their poor consumers the most,” said Ghosh. “Fertiliser prices have been contained for the kharif sowing season by increasing the allocations for subsidy. But all this could still affect fertiliser (availability) for the rabi sowing.” 

The LPG crisis itself seems unresolved, she added. Clusters like Morbi face their own questions. How long will they take to get back to normal?

A question about policy

A larger question lies here. Why is India’s energy resilience limited to short-term curtailments, as Arun put it? The answer goes beyond import dependence and strategic energy reserves. There is also misgovernance. 

Take import dependence. For decades now, it has been flagged as a strategic vulnerability for India. And yet, since 2014, India’s import dependence on energy has risen. For instance, even though imported natural gas is costlier than the fuels it seeks to replace, the NDA decided to treble the share of the fuel in India’s energy mix.

“The world has enough oil, both production and shipping capacity, for curtailment in some parts of the system to not be catastrophic,” said Arun. “But gas is another matter. Liquefaction capacity, LNG tanker capacity, import terminals and regasification capacity, all are inadequate.” India, he said, would have had to compete with China, Japan, Taiwan and South Korea for spot LNG if the shortage had persisted.

The government could have spent the funds currently flowing into gas purchase into renewables instead. In solar, its decisions have, however, bucking the global trend, the prices of both solar panels and solar tariffs are rising in India. A clutch of other decisions — like the one to overtly ally with Israel; curb oil buys from Iran and Russia; not create adequate strategic petroleum reserves; go slow on coal gasification; poor choice of PLI beneficiaries; not using price hikes to moderate demand for fertiliser and fossil fuels once the energy shock was upon us; and so on — have also weakened resilience.

To ensure lower costs from future energy crises, India has to redo its energy planning. The country has plentiful coal and sun — and some natural gas. It has to decarbonise faster into an electro-state, maybe try coal gasification, and leave domestic natural gas for strategic sectors like fertilisers. It also has to, as CarbonCopy wrote two years ago, revamp market design for renewables – be it the financials of discoms or how tenders are conducted. 

“India has to switch to electricity for cooking, abandoning the ill-conceived choice of imported hydrocarbon as the cooking fuel,” said Arun. “It must build large-scale energy storage capacity, to fully utilise the generation capacity of renewable power, which we ask to back down with increasing frequency. This can be pumped storage, of which a bit is coming up, green hydrogen (hardly any), molten salt (only in other countries), and least preferable, battery electric storage systems, which spell sustained dependence on China and extraction of minerals in faraway lands. India must also gasify coal, he said, and invest massively in tech to develop carbon capture for use.” 

That is the route to resilience, he said. “What has seen us through the Iran war is luck, not resilience. Luck that it proved short.”