The International Monetary Fund has cautioned governments against relying on broad-based fuel subsidies and price caps to shield consumers from the ongoing oil price shock triggered by the conflict in West Asia, warning that such measures could place additional pressure on already strained public finances.
In a policy note released on Wednesday, the IMF advised countries to allow domestic fuel prices to reflect international market trends and instead adopt “temporary, targeted, timely and tailored” fiscal interventions to protect vulnerable sections.
The multilateral institution stressed that blanket subsidies should be reserved only for exceptional situations, noting that poorly designed support measures can become fiscally expensive, fuel inflationary pressures and prove difficult to withdraw later.
The IMF's remarks come at a crucial time for India, where the Centre is facing tightening fiscal space amid concerns of revenue shortfalls and rising expenditure commitments in FY27.
The government had earlier reduced excise duty on petrol and diesel in March to cushion oil marketing companies from elevated crude prices without immediately increasing retail fuel rates. However, with mounting under-recoveries, fuel prices were eventually raised by nearly Rs 4 per litre this month.
Brent crude prices have surged by over 60 per cent since the outbreak of the US-Iran war in late February and have largely remained above the $100-per-barrel mark, raising concerns over inflation and subsidy burdens.
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The IMF recommended targeted cash transfers through existing welfare mechanisms rather than universal subsidies, suggesting temporary expansion of benefits for lower- and middle-income households if required. It also proposed one-time rebates and phased price adjustments for temporary shocks.
For businesses facing liquidity stress, the IMF backed measures such as sovereign-guaranteed loans and credit support — an approach India has already adopted through the Emergency Credit Line Guarantee Scheme (ECLGS 5.0) aimed at supporting MSMEs, airlines and other sectors.
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