Survival Instinct in the Time of Economic Uncertainty

THE MODI GOVERNMENT’S “AUSTERITY MEASURES” PREDICTABLY triggered speculation based on rumours of coercive measures. The anticipation was partly uninformed guesswork and partly deliberate mischief. On May 19, the finance minister clarified that reports about the government considering mandatory monetisation of gold held by temples and religious institutions were false and urged citizens not to believe such reports or circulate them. As the rumours swirled, officials said there was no case for drastic measures. Prime Minister Narendra Modi’s appeal was aimed at curbing discretionary spending, such as foreign travel for holidays and purchase of personal jewellery. He had not suggested that essential travel related to business and work be deferred and working from home was an option to reduce daily spending on fuel.

The decision to restore 15 per cent duty on import of gold and silver was greeted by commentators with the warning that the measure could encourage smuggling of the precious metals, prompting a policy analyst to suggest—only half in jest—that this was still better than dollars flowing out of the Reserve Bank of India (RBI). The prime minister’s remarks to an Indian diaspora audience in the Netherlands on May 17 that gains of decades of successful anti-poverty programmes could be rolled back if global conditions did not improve were a candid assessment of the world economic outlook. The global tremors set off by the closure of the Strait of Hormuz and a sharp decline in commerce to and from the Middle East have generated stress in India’s economy although the situation is well short of the crisis many countries are experiencing.

Since the US and Israeli attacks on Iran began and then tapered to a messy stalemate, India has diversified its sourcing of crude oil. But while supplies are not in danger of drying up, Brent is ruling at $117 a barrel, raising the dollar costs of energy imports. It is not that India’s strategic reserves are dangerously low. Taking into ac­count inventories of oil marketing companies and confirmed im­ports, petroleum reserves add up to a 70-day stock. Criticism that this should be at least 90 days does not take into consideration the cost of maintaining this level of stock in normal times. Yet, with normalcy seemingly a mirage, India is tapping partnerships in the Gulf to boost its reserves while the Union government and many states are trying to set an example by curbing official expenditure on cars and air travel. The current account deficit (CAD) widened to $13.2 billion in the December 2025 quarter from $11.3 billion in the same period the previous year, and the view in government is that foreign direct investment (FDI) cannot be expected to reduce the gap, with the risk-free US treasury yields reigning at 5 per cent and the Bank of Japan setting interest rates at a three-decade high of 0.75 per cent, which is expected to rise further.

In the past decade, India’s commerce with the Gulf Coopera­tion Council (GCC) states has grown from $110 billion to $178 billion, heralding a significant convergence of security, trade, and geopolitical interests. Commerce with GCC countries had fallen steeply by 31 per cent in April and the immediate outlook seems bleak with Iran’s rulers believing they can hold out against US President Donald Trump’s threats and the American leader look­ing for concessions from Tehran. While pump prices of fuels have been increased twice after the conclusion of the latest round of state elections, more measures might be under consideration to preserve foreign exchange. A case is made out for reduction in the annual $250,000 limit under the Liberalised Remittance Scheme (LRS) for individuals which is five times more than what China allows its citizens. The decision is not easy as it may be read as a sign of a deepening crisis and end up further weakening the rupee. Yet, though it is now being felt that such limits are best set in rupees rather than dollars, drastic corrections or radical shifts are unlikely unless the economic situation significantly worsens.

The commerce ministry released data that showed overall exports and imports reach $80.8 billion and $88.6 billion respec­tively, but these were significantly driven by a rise in volume and value of petroleum products—a benefit of India’s large and well-developed refining capacity and the ability of private refiners to source non-sanctioned crude floating on the seas. The commerce ministry also reported progress in adding new markets in FY26, with gains in sectors like ships and boat building, telecom instru­mentation, and nuclear reactor and boiler parts. The ministry also said traditional sectors like handlooms and oilseeds have accessed newer markets. The Director General of Foreign Trade (DGFT) has been holding continuous discussions with industry to ease access, reduce friction, and liaison with other ministries to resolve the pain points. While these actions are necessary and urgent measures, they still do not fill the hole caused by the massive disruption from the Middle East conflict.

In his speech at a rally in Telangana on May 10, when he first indicated a shift in gears after the state polls, Modi urged citizens to conserve fuel even as he detailed the consequences of the crisis that had blocked oil and natural gas supplies from the Middle East. Coming four days after the announcement of the Assem­bly election results, his address led to instant speculation that an increase in the prices of fuels was round the corner. That specula­tion proved correct but the reasons cited missed the target. Modi had said that his government had first focused on providing 100 per cent LPG coverage and was then promoting cheaper piped gas. “The demand of the time is also that petrol, diesel, gas—such things should be used with great restraint. These energy products that we import from abroad, we must try to use only as much as needed. This will save foreign exchange and also reduce the adverse effects of the crisis of war,” he had said.

By the time fuel prices—petrol, diesel and CNG—were in­creased on May 15, two-and-a-half months had passed since hostilities had broken out. During this period, a small number of oil and gas tankers managed to evade the Iranian dragnet and missiles and shells raining across the Strait of Hormuz, a trickle compared to the daily traffic headed to India before the war. Al­most 90 per cent of India’s LPG supplies and anywhere from 30 to 50 per cent of its oil requirements pass through this chokepoint.

Somehow, India managed. Barring sporadic episodes of panic, triggered by rumours, the country did not experience shortages that befell neighbouring countries. But this came at an immense cost. By the time prices were raised by a modest sum of ₹3 per litre for petrol and diesel and ₹2 per kilogram for CNG, India’s oil marketing com­panies (OMCs) had already incurred losses of ₹1,000 crore per day for 75 days. The loss added up to a hefty ₹75,000 crore. In the days that followed, further steps were taken to stem this tide. Fuel prices were raised a second time by a very modest amount of approximately 90 paise on May 19. A few days earlier, Special Additional Excise Duty of ₹3 per litre on exports of petrol, ₹16.5 per litre on diesel and ₹16 per litre on Aviation Turbine Fuel (ATF) were imposed by the government. On May 13, import duties on gold were raised from 6 per cent to 15 per cent even as imports of silver bars were put on the “restricted” list. Other measures were also undertaken to reduce India’s “non-essential” imports. In 2026-27, gold imports alone are estimated to be around 1.8 per cent of India’s GDP. In money terms this sums up to a tidy $73 billion. In an era of war and heightened uncertainty, India can scarce afford such heavy quantities of gold imports. For comparison, India’s CAD is estimated at 2.3 per cent of GDP in 2026-27.

At the point when fuel prices were increased, the matter had ceased to be one of OMCs bleeding their financial life and had entered the fiscal domain. Sooner or later, all countries have to reckon with these costs. India, invariably under Modi, tries to prolong this reckoning given that the lives of all citizens are af­fected. In 2026-27, India’s fiscal deficit is budgeted to be around 4.3 per cent of GDP, a tiny bit less than the 4.4 per cent in 2025-26. If the Centre were to absorb the entire hit of ₹75,000 crore suffered by OMCs, it would swell the fiscal deficit by around 4.4 per cent. The fiscal deficit—in absolute terms and not as percentage of GDP—is estimated at ₹16.96 lakh crore. Adding another ₹75,000 crore would only add to India’s burden.

In such conditions, a price increase was essential. During brief­ings by officials on the current situation, it was disclosed that the ₹3 per litre increase in fuel prices was enough to offset 25 per cent of the losses on account of underpricing by OMCs. This ought to be the first step in putting the hydrocarbon economy back on its rails.

THERE ARE THREE stories that can be told about the current economic crisis due to the war. One is factual: how likely India is to get into macroeconomic trouble. The second is part analytical and part prescriptive. The last is a tale of optimism. Unlike the usual carping that government economists only tell “partial truths”, the three stories have their backers in the private sector.

The first concern, given India’s mounting CAD and the con­tinuing slide in the rupee’s exchange rate, whether it be against the dollar or the wider Real Effective Exchange Rate (REER), is very different from the panic sought to be conveyed by certain quarters. In any situation where a country’s currency experiences rapid decline in its exchange rate, the first worry is the ability to maintain macroeconomic stability. The rupee has experienced a decline of around 12.8 per cent from mid-May last year to mid- May this year. This period can be divided into two parts to parse the effects of the war. From May 19, 2025 to March 2, 2026, the rupee fell by approximately 7.2 per cent against the dollar. But from March 2 to May 19 this year, it experienced a further—much sharper—decline of 5.2 per cent. This was in no small measure due to the burgeoning CAD and the government holding tightly to the price line for fuels even as global crude prices soared.

The decline of the rupee is one matter but the other question is whether India can afford to carry on essential imports like oil and gas, intermediate goods for industrial production, fertilisers and a host of other commodities necessary for running its economy. Here, there is little doubt about the basic stability of the Indian economy. India’s foreign exchange reserves stood at $691 billion at the end of March 2026, enough to cover 11 months of imports.

The stock of foreign exchange reserves, however, is a crude measure of a country’s ability to sustain itself. In a note on May 18, economists at HSBC India outlined a “dynamic analysis” of the situation and benchmarked “adequacy ratios against the low­est 10th percentile thresholds from India’s own history, to make sure minimum support levels are available. India is currently above this threshold across all metrics.” It is only in the extreme case, where the forecast of balance of payments (BoP) crosses the $65 billion mark in 2026-27, that this threshold (various mea­sures going below the 10th percentile) will be breached. Here, HSBC estimates that an additional $30 billion should take India back above the threshold. BoP is the sum of the current account balance and the capital account balance. It would be difficult to see the capital account even out the imbalance. Although the situation can be slippery, there is no danger of a “free fall”. BoP includes the goods trade deficit, services and income, and trans­fers from abroad. The capital account balance involves net FDI, portfolio inflows, loans, and debt. Traditionally, a CAD of up to 2.5 per cent of GDP is considered sustainable for India.

The so-called austerity measures should be seen in this light. It is one thing to panic when there is no need to, but an entirely differ­ent matter to plan prudently for a scenario that remains uncertain.

The analytical story of why India is experiencing volatility in its currency, weak FDI inflows, and the general “gloom” about the Indian economy was told in another note from JP Morgan. This note looked at India’s recent economic experience, in particular the combination of weak FDI inflows and currency volatility from the perspective of “pull” and “push” factors. A pull factor is specific to a country and the story it has on offer for global inves­tors. A push factor is global in nature: for example, there is a tight correlation between US’ 10-year treasury yields and India’s FDI inflows. The US treasury yield is a proxy for global financial condi­tions. Currently, India’s FDI flows are in the orbit of push factors. The note says, “Working on ‘pull factors’ that attract strong and sustained FDI to protect the external sector will have to be the key lesson India draws from this episode.” There is a close link between strong FDI inflows—which can mitigate stress on the external account—and BoP pressures. In the absence of strong FDI inflows, multiple channels will have to work to absorb these pressures: rupee depreciation—an ongoing process—incentivis­ing capital inflows, and managing the current account.

Increases in fuel prices can go some way in compressing demand for a commodity that is not only experiencing elevated prices but is physically difficult to access during the war in West Asia. This is not about old Soviet-style “demand management” but prudence to ensure that scarce resources—crude oil and natural gas—are rationally allocated to sectors where they are most needed. The prime minister was not indulging in empty rhetoric when he said we should consume these fuels wisely. The combination of alleged rhetoric and price increases ought to be seen as suasion backed by concrete measures. Prices of common retail goods have begun to rise and RBI Governor Sanjay Malhotra has said that while the bank could look through the fuel price hikes, a wider price increase may require a reassessment of interest rates that have been benign.

The last word goes to Chetan Ahya, Chief Asia Economist at Morgan Stanley. Writing in the Financial Times on May 19, he said Asia is now at the cusp of an “industrial supercycle”. A supercycle is a period of sustained economic growth that increases the demand for commodities and other goods. Ahya says Asia is experiencing sustained investments in renewable power, defence-related spend­ing and, in general, industrial capital expenditure. India is part of this trend, its temporary turbulence notwithstanding.

Ahya argues that “India will also benefit from the industrial cycle pick-up, together with a domestic capex boost from easy fis­cal and monetary policies.” Now, does that ring a bell somewhere in these gloomy times? Look at the sustained and unprecedented capital expenditures by the Centre from 2020 onwards; parse the annual growth rates experienced by India since 2022 that have rarely fallen below 7 per cent, despite prophecies of imminent doom. All this happened in the midst of pandemics, wars, and more wars. Growth and stability are not easy to sustain, but India has managed that in the midst of storms.