The upcoming Union Budget of 2026-27 is to be announced on February 1, where the government is likely to raise the excise duty on petrol and diesel to increase their revenue, according to a recent report by JM Financial. The brokerage feels that a possible excise duty increase of Rs 3-4 per liter over auto fuels is ‘quite likely’ in the run-up to the budget session as international oil prices continue to be modest as a whole, and the government is under pressure concerning its numbers.
Therefore, we think that Brent crude prices are likely to remain subdued at around $65 per barrel till the US mid-term elections in November 2026 as Saudi Arabia-led OPEC+ is expected to ensure the presently huge supply of 2-3 million barrels a day. Consequently, we think that the excise duty increase on auto fuels by the extent of Rs 3-4 per lit from the February 1, 2026, Union Budget could be quite likely as this will be able to increase the revenues for the Government by a substantial Rs 500-700 billion (or Rs 50,000-70,000 crores per annum in absolute terms at 0.15%-0.2% GDP impact, respectively,” stated the report by JM Financial on Thursday, January 8, 2026.
A crucial point was raised by JM Financial regarding oil marketing companies (OMCs) currently deriving higher than normal fuel marketing margins because of a tremendous plunge in oil prices. For a Brent oil price of about $61 per barrel, OMCs are currently deriving an auto fuel gross marketing margin (GMM) of about Rs 10.6 per liter, which is substantially higher than the normal level of about Rs 3.5 per liter. On an integrated basis, it is about Rs 19.2 per liter, which is substantially higher than the normal average of about Rs 12.2 per liter.
“Therefore, at spot Brent price of ~USD 61/bbl, the GMM & Integrated margin of OMCs is INR 6-7/ltr higher than the normalized margin,” as stated in the report. Such a buffer, argued JM Financial, provides the government leeway to raise the excise duty without necessarily increasing the retail fuel prices. Assuming their calculations to be correct, for each rupee of increased excise duty charged on auto fuels, the government will get approximately 17,000 crore of revenue a year. A hike of 3-4 rupees a liter will fetch the government 50,000-70,000 crore a year, which is 0.15-0.2% of the GDP.
“This brokerage points out that the Centre is already struggling to finance its operations. The actual revenues in April to November 2025 combined were about 56% of the annual projection, down from 60% in the same period of last year. Meanwhile, capex has remained robust, touching just below 59% of its annual target in the first eight months.”
JM Financial has also pointed out that the lower nominal GDP growth of approximately 8% in FY26 might reduce the chances of the government achieving its fiscal deficit target of 4.4% of GDP. The economist team of the brokerage firm forecasts that theCentre will increase its fiscal tightness, which might reduce the fiscal deficit target to between 4% to 4.2% of GDP in FY27.
In light of these developments, the brokerage finds fuel excise duties to be an attractive tool. “We think the government may have pushed back the call for an excise duty increase pending clarity on what the stabilised price of Brent might look like,” the report quoted. It added that with crude prices around $70 a barrel, the increase would not be possible.
However, as per JM Financial, Brent crude is expected to remain soft at $65 per barrel till the mid-term elections in November 2026. The reasons for this expectation were cited as the “ongoing global oil oversupply of 2-3 mmmb [million barrels a day] by the Saudi-led OPEC+ to keep oil prices lower and inflation in check in the US.” All these factors increase the prospects of a hike in excise duty in India.
“However, it is important to note that the government has already expressed intent to raise its indirect taxes, which was evident in the recent hike in excise duty on cigarettes, which came into effect from February 1, 2026, to raise revenue of around ₹50 billion,” a brokerage report stated.
However, excise duty hike would affect the net profit margin of OMCs. This was highlighted by JM Financial, as every Rs 1 per litre change in auto-fuel prices for GMM will lead to a change of 12-17% in the consolidated EBITDA of OMCs. Amongst the three majors, HPCL is most sensitive as it is more dependent on its marketing business.
In view of valuation issues and the risk that high margins might not be sustainability if passed on to the government through higher excise duties due to lower prices of crude, JM Financial is remaining cautious on this space. “Sell” recommendations were reiterated on HPCL, and “reduce” recommendations on BPCL and IOCL.
