While headlines in the big media and statements from Union ministers harp on the financial distress of state-run oil companies due to high crude prices, the actual crisis stems from a deliberate political choice by the Narendra Modi government to freeze the daily dynamic pricing mechanism. Oil marketing companies are booking massive under-recoveries, translating to a daily loss of nearly Rs 10 billion as global oil benchmarks remain high.However, this fiscal loss is an artificial crisis inflicted upon the public sector, since the pump prices were never brought down when crude prices were low. The government raised excise duties, earned higher dividends and collected more taxes by suspending market-linked dynamic pricing. Done in November 2021 for short-term political gains during election cycles, the Modi government eventually stalled the United Progressive Alliance-era (UPA-era) policy direction, burdening the Indian consumer with structurally higher living costs forcing state oil companies into a massive Rs 1.98 lakh crore deficit that taxpayers must ultimately fund.What is the dynamic fuel pricing model?The dynamic pricing model for retail fuel is built on the principle of market deregulation, where retail pump prices fluctuate daily to reflect real-time changes in international crude oil benchmarks, local taxes and currency exchange rates. This model replaces fixed or periodic administrative pricing, decided by the government or the oil companies, with automatic, market-linked adjustments.Did India have the dynamic fuel pricing model?Yes, the transition started when India moved to a fortnightly pricing system under the UPA government by the deregulation of petrol in 2010 and diesel in 2014. It was a deliberate move designed to transition India away from complete government control over energy prices for the consumer.Prior to deregulation, the Union government fixed fuel prices for months or years at a time under the Administered Pricing Mechanism. In linking domestic fuel prices to international markets, there was a risk of international oil market volatility hurting Indian consumers. The 14-day averaging smoothed out daily spikes and drops, ensuring that the prices transferred to retail pumps were relatively stable and predictable for the public.Also read: India Notifies New Petrol Standards With Ethanol Blend Upto 30%At that time, the retail fuel network across India lacked the widespread digital automation required to handle more frequent price updates. Adjusting prices once every fortnight gave oil companies and fuel station dealers sufficient leeway to coordinate and execute the updates smoothly across the national retail network. The fortnightly system also protected fuel station dealers from rapid inventory devaluation, in case of a sudden drop in global prices.When did India move to daily dynamic pricing model for fuel?The country moved to this daily dynamic pricing mechanism in June 2017 under the National Democratic Alliance (NDA) government. The state-run oil marketing companies, which control over 90% of the retail fuel market, were authorised to modify retail prices at 6:00 AM every day based on a 15-day rolling average of international product prices and the value of the Indian Rupee against the US Dollar.What are the advantages of the dynamic pricing model?The primary advantage of daily dynamic pricing is the elimination of sudden price shocks for consumers. By breaking down large monthly or fortnightly adjustments into small daily increments of a few paise, the model prevents the public friction associated with steep price hikes. More importantly, at a macro-economic level, these daily adjustments protect the profit margins of oil refining and marketing firms by ensuring that domestic retail rates closely track international crude prices. This removes the need for structural government interventions as are currently being done by the Modi government. It also encourages private sector investment in fuel retailing, since transparent pricing allows private entities to compete on equal terms with state-backed corporations.Do other countries also follow the dynamic pricing model?Following this pricing model aligned India with advanced economies like the United States, Japan and several European Union nations, where fuel retail prices vary continuously based on market dynamics. Independent fuel stations in these countries adjust prices multiple times a day based on localised supply, wholesale costs and margins. Countries like the UAE and others in Asia have moved toward more flexible pricing to avoid fiscal strain. India had adopted a structured version of this mechanism, using centralised calculations across state-run companies rather than purely localised dealer-level competition, but the underlying economic objective of linking domestic consumption to global energy realities was identical. The UPA-initiated pricing system positioned India closer to these market-oriented approaches, reducing the fiscal burden compared to the administered pricing era before 2010.When was the daily dynamic pricing model stalled in India?Despite the structural benefits, the Modi government effectively stalled dynamic pricing mechanism in November 2021, as the BJP faced some tough assembly elections. State-owned oil marketing companies implemented an unannounced freeze on retail petrol and diesel prices, halting the daily modifications required by the deregulation policy. This price freeze has remained largely unbroken since, rendering the daily dynamic pricing policy inactive in practice, without any official acknowledgement from the government.What were the reasons for the Modi government to do so?The primary drivers for halting the mechanism were short-term electoral calculations. The freeze was initiated ahead of critical provincial elections in late 2021 and was extended to shield the electorate from inflation prior to the 2024 national general elections. During this period, global crude oil prices varied due to geopolitical factors. By absorbing these price variations through oil company balance sheets instead of raising pump prices, the Modi government shielded voters from immediate pain. This approach also helped control headline inflation figures in the short term, obviating the risk of widespread public dissatisfaction during a tough election for Prime Minister Modi.Also read: The Claim of ‘Only 3%’ Hike in Petrol-Diesel Prices is Misleading. Here’s How.When the crude prices fell, the Modi government did not revert to the daily dynamic pricing model but raised the excise duties significantly. It also allowed the oil companies and private refiners to maximise their profits at the cost of the consumer. The profits went to the government as high dividends, cess and taxes while the consumer continued to suffer. This generated extra revenue for the central exchequer even as pump prices stayed elevated during low crude price periods.What were the major economic consequences of this decision of the Modi government?This political intervention directly generated severe under-recoveries for domestic oil marketing companies. An under-recovery occurs when the retail selling price of fuel falls below the operational cost of importing, refining and distributing the product. By freezing pump prices while global oil prices surged well above $100 per barrel, the Modi government forced state-run refiners to absorb massive financial losses on every litre of fuel sold. These losses strain company finances, affect investment capacity, and eventually require government support or higher future prices to recover. What is the big lesson from this decision of the Modi government?The suspension of the dynamic pricing model demonstrates how short-term electoral gains for Prime Minister Modi generate long-term economic pain for the Indian people. The Modi government’s strategy delivered short-term relief by limiting price volatility around elections and during global shocks. It helped manage public perception and shaped electoral outcomes favourable to the BJP. This came at the cost of economic discipline. It severely compromised the financial health of the state-run companies and distorted fiscal management. Because state-run companies then recouped their losses even after the global oil prices moderated, retail fuel prices in India remained artificially high long after global crude prices declined. Consumers now face sudden hikes after years of artificial stability, alongside higher indirect costs from inflation in transport and goods. Public finances bear the eventual cost through compensation or reduced dividends from oil companies. By subverting a transparent, market-linked pricing framework for short-term electoral benefits, Prime Minister Modi institutionalised structural inefficiencies and has left Indian consumers burdened with higher living costs and restricted public welfare spending.