PM’s austerity call: Can India withstand the global energy shock?

The West Asian crisis, which started in early March when Iran announced the closure of the Strait of Hormuz, was initially seen as a short-term blip in the global energy supply chain. It has now been more than two months, and there are no signs of resolution on the horizon. Some experts believe it may continue until the end of the year.

Against the backdrop of the West Asian crisis, Prime Minister (PM) Narendra Modi announced a set of austerity measures to help the economy navigate the uncertain environment. Crude oil prices, which remained in the range of $60–70 per barrel over the past 12 months, have crossed $100 per barrel. The world now faces an almost 40% increase in fuel prices.

The impact on India is severe, as crude oil remains a major component of the country’s import bill. India imports 90% of its fuel requirement, accounting for 27% of total imports and costing $134 billion in FY26. With rising prices, these numbers are expected to be even higher in FY27.

The PM has appealed for a set of austerity measures to tide over this energy crisis.

First, reducing fuel consumption to curb rising energy bills by encouraging citizens to adopt austerity measures. India is not alone in responding to this global energy crisis. Around 40 countries, including Vietnam, Thailand, Indonesia, the Philippines, and Myanmar among others, are preparing to address the crisis through innovative measures aimed at reducing fuel consumption.

Second, reducing the consumption of foreign goods and foreign travel for a year in order to conserve foreign exchange. India’s prosperity over the past decade, during which per capita income doubled, has created aspiring global citizens, making international travel increasingly fashionable. Last year, 33 million Indians travelled abroad to destinations such as the UAE, Southeast Asia, the US and Europe.

These Indian tourists generate substantial demand for foreign exchange, putting pressure on the value of the rupee. The rupee, which was trading at $1 = ₹85 last year, is now trading at approximately $1 = ₹96, a depreciation of around 12%.

The value of the rupee in the foreign exchange market is determined by the supply and demand for dollars in India, as reflected in the balance of payments. Exporters, foreign investors, and foreign tourists are major suppliers. All three categories are witnessing a slowdown due to increasing geopolitical uncertainty across the world. Importers and Indian tourists travelling abroad generate demand. When demand for dollar exceeds supply, the rupee depreciates, as it has over the last year.

Third, the appeal is to reduce gold purchases for a year. This is a difficult proposition, as gold remains one of the most important asset class in India. Gold has continued to perform strongly as a safe-haven asset, delivering annualised returns of nearly 40%. It has once again established itself as one of the best-performing asset class.

India imported around $72 billion worth of gold in FY26, amounting to 721 tonnes, despite higher prices. It may be difficult for people to set aside their fascination with gold for even a year. One is reminded here of South Korea’s experience during the 1997 currency crisis, when citizens voluntarily contributed gold to the government to help manage national debt. Can we at least stop buying new gold?

Fourth, reducing imports of fertiliser and cooking oil to lower the import bill while also encouraging overdue healthy lifestyle changes.

These austerity measures are relatively manageable, as they target non-essential consumption. They ask Indians to remain sensitive to the geopolitical environment and act as responsible citizens. For now, the PM has chosen moral persuasion. If people respond responsibly, India may be able to avoid inflationary pressure and further rupee depreciation.

If the appeal falls on deaf ears, the only option left for the government may be to pass on even higher petroleum prices to consumers, making fuel costlier and thereby reducing demand. The Petroleum Minister has stated that oil companies are losing ₹1 lakh crore per day, which is unsustainable.

Raising fuel prices could trigger an inflationary spiral through the transport sector, further weaken the currency, and destabilise the macroeconomy. This time, the government has taken a calculated chance; if these austerity measures succeed, a larger crisis may yet be averted.

(This article is written by Pallavi Mody, Honorary Visiting Faculty, Economics and Policy, at S.P. Jain Institute of Management & Research (SPJIMR). This is an opinionated article; EPN has nothing to do with this editorial.)