Introduction
There’s been a viral video on youtube the place a younger Indian politician is seen evaluating diesel value of 2014 vs that of at the moment’s (2025). Once I say this video, a thought got here to thoughts.
It’s about diesel costs and inflation in India.
The numbers from 2014 and July 2025 inform an fascinating story.
Again in 2014, diesel was round Rs 55 per liter, and inflation was at 6.67%. Quick ahead to July 2025, diesel is Rs 90 per liter, however inflation is simply 4.13%. Unusual, proper?
We typically assume that greater gas costs would imply greater inflation in India.
The logic of this assumption additionally appears proper as a result of India imports most of its vitality.
So, what’s occurring? Why inflation is lowers in 2025 in comparison with 2014, although diesel value is nearly 90% greater at the moment.
Let’s work out how that is doable.
1. What’s is Inflation?
Let’s begin from the fundamentals.
Inflation is how briskly costs of issues we purchase, like meals, garments, or gas, go up.
In India, we monitor it with the Client Worth Index (CPI). We are able to say that CPI tracks the typical value of a hard and fast “basket” of products and providers, like meals, garments, and gas (diesel, petrol, LPG, and so forth). It encompass that these objects which individuals sometimes purchase. Change in CPI is symbolic of how these costs change over time.
When CPI goes up, it means inflation is rising as a result of issues are getting costlier.
Diesel issues so much right here. It runs our vans, tractors, and factories. So, when diesel will get pricier, you’d anticipate every part else to comply with.
However that’s not what’s appears to be occurring between 2014 and 2025 examples we mentioned above (see right here).
Why not?
2. The Numbers of 2014 vs. 2025
Let’s have a look at the information.
- In 2014, diesel value Rs.55 per liter. Inflation was 6.67%. It was excessive, proper?
- Now, in July 2025, diesel is Rs.90 per liter. That’s 90% bounce. However inflation? It’s right down to 4.13%.
How can inflation drop when gas prices extra? It doesn’t add up at first.
India depends closely on imported oil. Nearly 85% of our complete crude oil demand is imported.
So greater diesel costs ought to hit our inflation exhausting, proper?
It’s barely extra difficult than this. To grasp this, we have to perceive one other puzzle associated to inflation.
3. The Puzzle
So, why this disconnect?
Inflation isn’t nearly gas. It’s a mixture of many issues.
3.1 Authorities’s Function: Subsidies and Taxes
Again in 2014, the federal government stored diesel costs low with subsidies. However borrowed cash to pay for these subsidies.
Subsidies improve our fiscal deficit.
What is that this deficit? It’s mainly spending greater than incomes. That may push inflation up.
However let me offer you couple of extra information:
So you possibly can see, each fiscal deficit and taxes had been higher in 2014. So, most likely this isn’t the explanation why inflation was greater in 2014.
Let’s examine different factors that contribute to inflation.
[Note: Higher taxes on fuel could fund stuff like roads or food subsidies, keeping other prices stable.]
3.2 Rupee vs. Greenback: The Change Recreation
About 85% of India’s crude oil demand is imported.
About 70% of Indian imports come from Center East: Iraq- 31%, Saudi Arabia- 27%, and UAE- 12.2%. One other 21% comes from Russia and steadiness about 9% is imported from USA. Supply: eximpedia.
All these import transaction are primarily achieved in USD. So the rupee’s worth issues.
If the rupee is weak, oil will get costlier in our foreign money.
- In 2014, the Indian Rupee (NR) was doing nicely. Again then, it was at about Rs.61/USD.
- Right now in 2025, its about Rs.87/USD.
As INR was stronger then, it means we had been importing extra crude oil for each INR.
A stronger rupee makes imported oil cheaper for us.
So once more, you possibly can see, the INR was stronger in 2014. So, most likely that is additionally not the explanation why inflation was greater in 2014.
3.3 International Oil Costs
Crude oil costs aren’t fastened.
- In 2014, the worldwide crude oil value was excessive. On a mean, it was shut of $95 per barrel. However keep in mind, on the pumps, the worth of diesel was solely Rs.55 per litre.
- Quick ahead to 2025. International vitality costs are decrease. On common, until July 2025, the typical crude oil value is near $70 per barrel. Although crude oil value is decrease now, for us the price of diesel at pumps is about Rs.90 per litre. We’ve seen in our earlier level (3.1), the taxes are excessive in 2025. That is the explanation why at pumps we’ve got to pay greater for each litre of diesel.
Excessive crude oil costs is one main motive which I feel was conserving inflation excessive in 2024.
In 2014, excessive world crude oil costs ($95/barrel) elevated prices throughout the economic system. This drove the inflation to six.67% ranges, regardless of decrease diesel taxes.
Although at pumps the worth of gas was decrease, however authorities was giving subsidies to maintain it low. These subsidies elevated the fiscal deficit, as the federal government borrowed to cowl prices, placing inflationary strain on the economic system.
In 2025, decrease crude oil costs ($70/barrel) cut back value pressures. It’s serving to the federal government to conserving inflation at 4.13% ranges and likewise cost greater greater taxes.
3.4 The Composition of the CPI Basket
In India’s Client Worth Index (CPI) basket, the load of gas, particularly the “Gas and Gentle” class, is comparatively small in comparison with different objects.
Based mostly on the CPI with the bottom 12 months 2012, right here’s the breakdown of weights for main classes, together with gas, as per the most recent accessible knowledge:
| SL | CPI Class | Weight (%) |
|---|---|---|
| 1 | Meals and Drinks | 45.86% |
| 2 | Miscellaneous (well being, training, and so forth.) | 28.32% |
| 3 | Housing | 10.07% |
| 4 | Gas and Gentle | 6.84% |
| 5 | Clothes and Footwear | 6.53% |
| 6 | Pan, Tobacco, and Intoxicants | 2.38% |
| – | Whole | 100% |
Supply: mospi.gov.in
- Meals and Drinks (45.86%): This class has the very best weight, reflecting India’s excessive family spending on meals objects like rice, wheat, greens, and milk. It dominates because of the giant rural and lower-income inhabitants the place meals is a serious expense.
- Miscellaneous (28.32%): Contains providers like healthcare, training, and transport, that are more and more vital in city areas. Transport inside this class might embody some fuel-related prices, however its weight is separate from the “Gas and Gentle” group.
- Housing (10.07%): Primarily related for city areas, protecting lease and upkeep prices. It has a decrease weight in rural CPI calculations.
- Gas and Gentle (6.84%): Covers family vitality wants like electrical energy, LPG, and kerosene. Its comparatively low weight explains why gas value hikes (e.g., diesel) don’t at all times drive excessive inflation.
- Clothes and Footwear (6.53%): Contains clothes and footwear, with a modest weight reflecting important however lower-priority spending.
- Pan, Tobacco, and Intoxicants (2.38%): Smallest class, protecting discretionary objects like tobacco and alcohol, with minimal affect on general CPI.
This low weight of gas explains why diesel value hikes, just like the bounce from Rs. 55 in 2014 to Rs. 90 in 2025, don’t at all times result in excessive inflation. Different heavier-weighted objects, like meals, can offset gas’s affect if their costs stay secure.
Conclusion
So, what’s the actual story behind India’s inflation puzzle?
- In 2014, excessive crude oil costs at $95 per barrel, regardless of subsidies conserving diesel at Rs. 55 per liter, drove inflation to six.67% by rising prices throughout the economic system.
- In 2025, decrease crude oil costs at $70 per barrel, even with greater taxes pushing diesel to Rs. 90, hold inflation at 4.13%.
The CPI basket’s low gas weight (6.84%) and secure meals costs additional soften the blow.
Add to that the function of RBI and a relatively extra buoyant economic system, roughly factors to the the reason why 2014 confronted greater inflation.
India’s studying to steadiness gas prices higher.
Have a cheerful investing.
