Table of Contents
Introduction
There’s been a viral video on youtube where a young Indian politician is seen comparing diesel price of 2014 vs that of today’s (2025). When I say this video, a thought came to mind.
It’s about diesel prices and inflation in India.
The numbers from 2014 and July 2025 tell an interesting story.
Back in 2014, diesel was around Rs 55 per liter, and inflation was at 6.67%. Fast forward to July 2025, diesel is Rs 90 per liter, but inflation is only 4.13%. Strange, right?
We generally assume that higher fuel prices would mean higher inflation in India.
The logic of this assumption also seems right because India imports most of its energy.
So, what’s going on? Why inflation is lowers in 2025 compared to 2014, even though diesel price is almost 90% higher today.
Let’s figure out how this is possible.
1. What’s is Inflation?
Let’s start from the basics.
Inflation is how fast prices of things we buy, like food, clothes, or fuel, go up.
In India, we track it with the Consumer Price Index (CPI). We can say that CPI tracks the average price of a fixed “basket” of goods and services, like food, clothes, and fuel (diesel, petrol, LPG, etc). It consist of that those items which people typically buy. Change in CPI is symbolic of how those prices change over time.
When CPI goes up, it means inflation is rising because things are getting more expensive.
Diesel matters a lot here. It runs our trucks, tractors, and factories. So, when diesel gets pricier, you’d expect everything else to follow.
But that’s not what’s seems to be happening between 2014 and 2025 examples we discussed above (see here).
Why not?
2. The Numbers of 2014 vs. 2025
Let’s look at the facts.
- In 2014, diesel cost Rs.55 per liter. Inflation was 6.67%. It was high, right?
- Now, in July 2025, diesel is Rs.90 per liter. That’s 90% jump. But inflation? It’s down to 4.13%.
How can inflation drop when fuel costs more? It doesn’t add up at first.
India relies heavily on imported oil. Almost 85% of our total crude oil demand is imported.
So higher diesel prices should hit our inflation hard, right?
It is slightly more complicated than this. To understand this, we need to understand another puzzle related to inflation.
3. The Puzzle
So, why this disconnect?
Inflation isn’t just about fuel. It’s a mix of many things.
3.1 Government’s Role: Subsidies and Taxes
Back in 2014, the government kept diesel prices low with subsidies. But borrowed money to pay for those subsidies.
Subsidies increase our fiscal deficit.
What is this deficit? It is basically spending more than earning. That can push inflation up.
But let me give you couple of more facts:
- In 2014, the fiscal deficit of India was about -4% as compared to today’s -4.8%. Read more about India’s trade deficit and how does it matter to us.
- In 2014: About 30% of the retail price of diesel was taxes. Today in 2025, about 50% of the price are taxes.
So you can see, both fiscal deficit and taxes were better in 2014. So, probably this is not the reason why inflation was higher in 2014.
Let’s investigate other points 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. Dollar: The Exchange Game
About 85% of India’s crude oil demand is imported.
About 70% of Indian imports come from Middle East: Iraq- 31%, Saudi Arabia- 27%, and UAE- 12.2%. Another 21% comes from Russia and balance about 9% is imported from USA. Source: eximpedia.
All these import transaction are mainly done in USD. So the rupee’s value matters.
If the rupee is weak, oil gets costlier in our currency.
- In 2014, the Indian Rupee (NR) was doing well. Back then, it was at about Rs.61/USD.
- Today in 2025, its about Rs.87/USD.
As INR was stronger then, it means we were importing more crude oil for every INR.
A stronger rupee makes imported oil cheaper for us.
So again, you can see, the INR was stronger in 2014. So, probably this is also not the reason why inflation was higher in 2014.
3.3 Global Oil Prices
Crude oil prices aren’t fixed.
- In 2014, the global crude oil price was high. On an average, it was close of $95 per barrel. But remember, at the pumps, the price of diesel was only Rs.55 per litre.
- Fast forward to 2025. Global energy prices are lower. On average, till July 2025, the average crude oil price is close to $70 per barrel. Though crude oil price is lower now, for us the cost of diesel at pumps is about Rs.90 per litre. We have seen in our earlier point (3.1), the taxes are high in 2025. This is the reason why at pumps we have to pay higher for every litre of diesel.
High crude oil prices is one major reason which I think was keeping inflation high in 2024.
In 2014, high global crude oil prices ($95/barrel) increased costs across the economy. This drove the inflation to 6.67% levels, despite lower diesel taxes.
Though at pumps the price of fuel was lower, but government was giving subsidies to keep it low. These subsidies increased the fiscal deficit, as the government borrowed to cover costs, putting inflationary pressure on the economy.
In 2025, lower crude oil prices ($70/barrel) reduce cost pressures. It is helping the government to keeping inflation at 4.13% levels and also charge higher higher taxes.
3.4 The Composition of the CPI Basket
In India’s Consumer Price Index (CPI) basket, the weight of fuel, specifically the “Fuel and Light” category, is relatively small compared to other items.
Based on the CPI with the base year 2012, here’s the breakdown of weights for major categories, including fuel, as per the latest available data:
| SL | CPI Category | Weight (%) |
|---|---|---|
| 1 | Food and Beverages | 45.86% |
| 2 | Miscellaneous (health, education, etc.) | 28.32% |
| 3 | Housing | 10.07% |
| 4 | Fuel and Light | 6.84% |
| 5 | Clothing and Footwear | 6.53% |
| 6 | Pan, Tobacco, and Intoxicants | 2.38% |
| – | Total | 100% |
Source: mospi.gov.in
- Food and Beverages (45.86%): This category has the highest weight, reflecting India’s high household spending on food items like rice, wheat, vegetables, and milk. It dominates due to the large rural and lower-income population where food is a major expense.
- Miscellaneous (28.32%): Includes services like healthcare, education, and transport, which are increasingly significant in urban areas. Transport within this category may include some fuel-related costs, but its weight is separate from the “Fuel and Light” group.
- Housing (10.07%): Primarily relevant for urban areas, covering rent and maintenance costs. It has a lower weight in rural CPI calculations.
- Fuel and Light (6.84%): Covers household energy needs like electricity, LPG, and kerosene. Its relatively low weight explains why fuel price hikes (e.g., diesel) don’t always drive high inflation.
- Clothing and Footwear (6.53%): Includes garments and shoes, with a modest weight reflecting essential but lower-priority spending.
- Pan, Tobacco, and Intoxicants (2.38%): Smallest category, covering discretionary items like tobacco and alcohol, with minimal impact on overall CPI.
This low weight of fuel explains why diesel price hikes, like the jump from Rs. 55 in 2014 to Rs. 90 in 2025, don’t always lead to high inflation. Other heavier-weighted items, like food, can offset fuel’s impact if their prices remain stable.
Conclusion
So, what’s the real story behind India’s inflation puzzle?
- In 2014, high crude oil prices at $95 per barrel, despite subsidies keeping diesel at Rs. 55 per liter, drove inflation to 6.67% by increasing costs across the economy.
- In 2025, lower crude oil prices at $70 per barrel, even with higher taxes pushing diesel to Rs. 90, keep inflation at 4.13%.
The CPI basket’s low fuel weight (6.84%) and stable food prices further soften the blow.
Add to that the role of RBI and a comparatively more buoyant economy, roughly points to the reasons why 2014 faced higher inflation.
India’s learning to balance fuel costs better.
Have a happy investing.
