India Imposes Diesel Sales Restrictions to Tighten Defenses against Oil Shock

India is strengthening its economic defenses as rising energy costs linked to the Iran conflict put pressure on fuel supplies, the currency and inflation, prompting authorities to introduce diesel purchase limits and consider broader fiscal measures.

The government announced on Friday new restrictions on diesel sales, limiting purchases to 200 liters per customer per day as fuel retailers struggle to manage increased demand and rising supply costs.

Separately, authorities are preparing for the possibility that the country’s budget deficit could exceed its target by up to 50 basis points, according to people familiar with the matter.

The latest measures follow a series of steps announced by the Reserve Bank of India and the government aimed at attracting foreign capital and supporting the Indian rupee after it fell to a record low.

The measures include easing investment rules and offering tax incentives to foreign investors, moves that analysts say could attract significant inflows into Indian stocks and bonds.

“Recent announcements show that the government is using all available tools to protect the economy from further shocks,” said Garima Kapoor, an economist at Elara Capital.

As the world’s third-largest oil importer, India remains highly vulnerable to global crude price increases.

The country relies heavily on imports for crude oil, liquefied petroleum gas and fertilizer supplies, with a significant share traditionally passing through the Strait of Hormuz, which has faced prolonged disruption.

The energy shock has weighed on the rupee, which dropped close to 97 rupees per dollar before authorities introduced measures to strengthen foreign inflows.

Diesel accounts for around 40% of India’s total petroleum product demand and is widely used in transportation, construction, agriculture and backup power generation.

State-owned fuel retailers have faced difficulties meeting demand while selling fuel below market levels, with some stations reporting shortages.

“This is an unusually aggressive move for India,” said Prashant Vasisht, senior vice president at rating agency ICRA, noting that such restrictions are rare in the country.

To shield the economy from the shock, the government is reportedly prepared to allow the fiscal deficit to widen to around 4.8% of GDP in the current financial year, compared with the previous target of 4.3%.

The last time India missed its budget deficit target was during the pandemic.

Meanwhile, the central bank chose not to raise interest rates last week, prioritizing measures to support the rupee while monitoring inflation risks.

India’s policymakers are balancing the need to contain price pressures with efforts to protect economic growth, which is expected to slow significantly from last year’s pace of more than 7%.

Official data showed inflation accelerated in May but remained below the Reserve Bank of India’s 4% target.

Economists said the government’s response aims to prevent higher oil prices from turning into a broader economic downturn.

“The priority is protecting the economy in the near term, even if it comes with slightly higher inflation and a slower pace of fiscal consolidation,” said Madan Sabnavis, chief economist at Bank of Baroda.