As the Middle East conflict extends into its third month with no clear end in sight, Prime Minister Narendra Modi is urging Indians to adopt austerity measures not witnessed since the pandemic. He called for measures such as working from home where feasible, avoiding non-essential foreign travel, reducing gold purchases, and consuming less fuel.
This appeal, made at a public event in Hyderabad, resonated with the spirit of the Covid years, when the Prime Minister galvanized the nation around a common cause through symbolic mass participation. This time, the collective objective is economic survival: saving crucial foreign currency reserves. Predictably, this message caused a stir in India’s financial markets.
Uday Kotak, a veteran Indian banker, advised industry leaders this week, stating, “My view is we should prepare for paranoia before the event. We must prepare for the worst.” He further elaborated, “We have not yet experienced the full impact of the Middle East conflict on energy price transmission over the past two months… It is approaching significantly, and consumers have not yet felt the pressure.”
India’s Economic Vulnerability
India’s economic vulnerability is clear. The nation relies on imports for approximately 90% of its crude oil and half of its gas requirements. The closure of the Strait of Hormuz – a critical Gulf chokepoint for global oil shipments – for over two months amidst the regional conflict has caused India’s import bill to surge by billions of dollars.
Airfares have soared as airlines transfer increased fuel costs to passengers. Overseas holidays are becoming more costly. Gold imports, a persistent drain on foreign exchange, have become a new focus, with the government significantly increasing import duties on gold and silver to 15%.
Rajeswari Sengupta, an associate professor of economics at the Indira Gandhi Institute of Development Research in Mumbai, warns that “What was initially perceived as a temporary shock could now evolve into a prolonged crisis. Should this occur, India might be among the most severely impacted economies.”
Modi’s direct appeal stems from a deeper concern in Delhi: not an imminent shortage of foreign currency, as experienced during the 1991 balance-of-payments crisis, but rather that demand for foreign currency is beginning to outpace supply at an alarming rate. In 1991, India’s reserves could barely cover three weeks of imports. Today, the country boasts approximately $690 billion (£510 billion) in reserves, ranking among the world’s largest and sufficient to finance goods imports for 11 months. While there is no immediate default risk, the underlying pressures are substantial.
Imports of oil, gas, fertilizer, and gold are driving up demand for foreign currency, coinciding with weakening foreign investment inflows, slowing exports, and geopolitical uncertainty unsettling markets. India’s foreign exchange reserves have decreased by $38 billion since the regional conflict began, marking one of the sharpest declines in the region.
Petroleum Minister Hardeep Singh Puri attempted to assuage concerns, asserting there was no fuel shortage. However, crude oil prices at $100 a barrel are significantly straining government finances.
According to Aurodeep Nandi and Sonal Varma of Nomura, a Japanese broking house, “Modi’s comments indicate that the pressure on government fiscal finances is reaching a tipping point, suggesting less tolerance for further rupee depreciation and a potential incremental sharing of the adjustment burden with consumers.” Nomura projects India’s fiscal deficit to expand to 4.6% of GDP by March 2027, exceeding the budget target of 4.3%. The balance of payments gap has also surpassed $70 billion.
V. Anantha Nageswaran, India’s Chief Economic Adviser, recently stated that managing India’s external balances and preventing further rupee weakness will be the “key macroeconomic challenge” this year. However, economists contend that the rupee’s issues predate the current conflict and cannot be resolved solely through austerity.
Challenges to Investment and Currency
Foreign investors have withdrawn approximately $22 billion from Indian equities in recent months, influenced by concerns about slowing global trade, US tariff threats, and India’s competitiveness in nascent industries like AI, batteries, and electric vehicles. Sengupta notes, “Since India has not made significant strides in AI, renewable energy, or semiconductors, there are fewer industries generating the excitement or long-term returns that investors are now finding elsewhere in Asia.” She adds that “Even with economic growth at 6-6.5%, the broader investment narrative appears less compelling.” Net foreign direct investment has stagnated, contributing to the rupee becoming one of Asia’s weakest-performing currencies this year, declining by about 6-7%.
Ruchir Sharma, a global investor and author, recently remarked at an event organized by the Indian Express newspaper, “In my 30 years of investing, I have never witnessed such investor indifference toward India.”
Many economists suggest that India has little alternative but to endure some economic hardship: external shocks, such as elevated oil prices, invariably increase costs, weaken currencies, and suppress consumer demand. For instance, if petrol prices rise, driving decreases; if LPG prices increase, households economize. A weaker rupee makes imports more expensive while boosting export competitiveness, which can help narrow the current account deficit over time.
However, many economists point out that India has historically viewed currency depreciation not merely as an economic adjustment but as an issue of national prestige. Policymakers are reportedly uneasy about the “political optics” of a sharply weakening rupee. A depreciation towards 100 rupees to the dollar would likely become a powerful symbol of economic vulnerability. Notably, in 2013, Modi himself criticized the then Congress-led federal government over the rupee’s decline against the dollar, alleging it was “neither concerned about the economy nor the falling rupee” and focused solely on “saving its position.”
Moral Persuasion vs. Market Arithmetic
Now, instead of solely relying on market prices to curb demand, Modi has opted for moral persuasion, urging Indians to voluntarily reduce consumption in the national interest. Economists interpret this message as clear: if supply cannot be augmented, demand must be curtailed. The central question remains whether patriotic austerity can effectively replace the more stringent arithmetic of market forces.
Rahul Ahluwalia, founder director of the Foundation for Economic Development, told the BBC that “Consumers cannot and should not be completely insulated from global supply shocks, because that will cause even more pain later.” He further cautioned that shielding consumers now could exacerbate future shortages, impede the energy transition, and place additional strain on government finances. State-run oil companies are already nearing their capacity to absorb accumulating losses.
The core debate centers not on whether prices should increase, but on who should bear the economic burden. The government had absorbed the price shock for two months, postponing pump price hikes amidst a series of state elections. However, on Friday, India raised petrol and diesel prices for the first time in four years, with Delhi retailers increasing rates by three rupees ($0.03) per liter – over 3% – to offset losses from elevated global crude prices.
Economists like Sengupta argue that universally shielding consumers through artificially cheap fuel is unsustainable. Instead, they advocate for targeted relief, such as wartime-style subsidies for poorer households, particularly for cooking gas, while allowing prices to adjust for others.
India’s inflation is already on an upward trajectory. HSBC described the latest inflation figures as “calm before the climb,” anticipating price increases due to “twin energy and Niño shocks” – which will compel the central bank to raise borrowing costs. For years, India’s economic managers have attempted to mitigate every shock. However, oil markets are relentless. Ultimately, the cost must be paid, and the longer price adjustments are delayed, the more difficult the eventual correction becomes.
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