Why is the Prime Minister advocating austerity?
Context:
Amid the ongoing West Asia crisis, Prime Minister Narendra Modi laid out a seven-fold set of suggestions for the Indian public to help the economy and the government’s finances.
These suggestions and efforts were aimed to reduce India’s imports of oil and petroleum products, gold and fertilizers.
Reasons for Advocating Austerity measures:
Oil Imports:
The war in West Asia has created a global energy crisis.
India imports 85-90% of its oil requirement. This means that any time the price of oil goes up internationally, the country’s import bill increases.
Oil alone makes up about 17% of India’s total goods import basket.
That is why three out of Mr. Modi’s seven suggestions were aimed at reducing fuel usage and oil imports.
Gold Imports
The war has also led to an increase in the price of gold as investors ock to it as a ‘safe haven’ asset in times of uncertainty
The price of gold increased by 45-60% over the last year, the volume of India’s gold imports fell only about 5% in the same period.
higher price only impacted the demand for gold at the margins; the bulk of purchases has continued.
Rupee Depreciation
The currency breached the 96-to-a-dollar mark on May 15, 2026.
A year ago, the currency was trading at about 85 to a dollar.
Throughout this period, the Reserve Bank of India has been stepping in to stabilise the fall of the rupee and reduce volatility, mainly by selling the dollars in its reserves and absorbing rupees in the market.
As a result, the Reserve Bank of India’s foreign exchange reserves fell to $552.4 billion as of May 8, 2026, from $581.4 billion a year earlier — a decline of about $29 billion.
Foreign Institutional Investors (FII):
FII’s have been pulling out large sums from Indian markets by sell in rupees and are repatriated in dollars, which created another signicant channel of dollar out flows.
Impact on Indian Economy:
Current Account Deficit (CAD) is set to grow to about 2.5% of the GDP in this nancial year from 1.4% as recently as the quarter ended December 2025.
A sustained high CAD may lead to cascading effects on Indian Economy
Measures taken by GoI:
Doubled the effective tax to be paid on the import of gold and silver to a total of 18.4% from 9.2%.
The prices of petrol and diesel were hiked on May 15 by 3 a litre each, in an attempt to reduce demand.