Austerity is typically associated with economies that have weak fundamentals or otherwise lack options for achieving fiscal sustainability. But the Indian economy’s fundamentals are relatively strong. Real GDP growth is expected to reach 7.4% this fiscal year, with medium‑term potential growth hovering around 7%. Moreover, private consumption now accounts for 61.5% of GDP, the highest share since 2011–12.
India’s vulnerability lies in its external account: the country runs a persistent merchandise-trade deficit of roughly $280–300 billion annually, which is only partly offset by services, and which is financed largely by capital inflows (including remittances). While this is not a problem during times of relative stability, it generates acute risks when energy prices surge and global capital becomes more risk-averse.
The United States and Israel’s war on Iran has produced precisely this combination, and Indian equity investing is compounding the risks. This is exemplified by the recent rally in the South Korean and Taiwanese equity markets—a reflection of the global AI and semiconductor boom—with foreign-capital outflows from the Indian stock market, which lacks AI offerings, totaling $37 billion since January 2025.
Modi’s government sees the writing on the wall, so it is taking steps to prevent a sudden terms‑of‑trade shock from triggering shortages, fueling inflation, destabilizing financial markets, and eroding India’s strategic autonomy. To this end, purchasing power in dollars must be sustained as energy imports, shipping insurance, and freight costs rise.
Gold is one of India’s largest discretionary import lines, paid for in foreign exchange. But according to the State Bank of India, the value of gold imports rose from $57.9 billion in fiscal year 2025 to $72.4 billion in 2026, even as volumes fell. Likewise, crude prices jumped from $62–70 per barrel in February 2026 to above $100 today, while import volumes declined. Every $10 increase in Brent crude adds an estimated $13–14 billion to India’s import bill and widens the current-account deficit by about 0.3% of GDP.
Measures such as raising effective import duties on gold and silver to 15% and stabilizing the supply of staple goods are intended to limit avoidable dollar outflows. They are blunt instruments, but they take effect quickly, enabling the state to absorb some of the pressure on margins before it spreads through the broader economy.
More must be done, but India has prepared for this moment. Over the past five years, the government has worked to build up buffers and strengthen domestic capacity in logistics, infrastructure, manufacturing, and energy supplies. Supply chains have been diversified, with India now sourcing energy from nearly 40 countries. Domestic refiners have increased their output of liquefied petroleum gas by roughly 25%. India would have far less room for maneuver today had it not taken such steps.
To maximize this breathing room, India must ring‑fence its external account without choking growth. The State Bank of India’s group chief economic adviser, Soumya Kanti Ghosh, has proposed opening a special foreign-exchange window for oil marketing companies, which would separate their daily demand for dollars (around $250–300 million) from other market operations. This would stabilize the rupee, which has depreciated sharply, and prevent bulk dollar purchases from becoming the dominant market signal.
If global conditions worsen, a time‑bound foreign-currency non-resident bank swap window could also steady forex markets, inject foreign-currency liquidity into the economy, and ease pressure on the rupee. Careful management of external commercial borrowing would also help. In previous crises, the government had successfully raised capital from the diaspora through the Resurgent India Bonds and India Millennium Deposits.
But such measures would have to be matched by reforms at the national, state, and local levels to accelerate execution. The Department for Promotion of Industry and Internal Trade’s updated standard operating procedure for paperless processing of foreign direct investment proposals is a step in the right direction, but effective implementation is essential.
In the medium term, India must build on the eight free-trade agreements it has secured since 2021—including a landmark agreement with the European Union—to increase its export competitiveness. Lower logistics costs, faster trade facilitation, predictable regulation, and a credible pipeline of higher‑value manufacturing exports will go a long way toward supporting progress.
The power sector is central to the necessary adjustment. India’s state-owned powerdistribution companies have accumulated financial losses exceeding $69 billion. But without a solvent distribution network, renewable deployment slows, capital costs rise, and import dependence remains higher than necessary. Tariff rationalization, substituting leaky subsidies with direct benefit transfers, and stronger contract enforcement are thus urgent. In the longer term, India must reduce the economy’s oil intensity, so that the next shock feels smaller.
Beyond energy, India must diversify its payment systems, rebuild its manufacturing competitiveness, and strengthen its AI sector. Increasing investment in research and development to 2–3% of GDP (from 0.6–0.7% of GDP today)—whether through direct government intervention or incentives for private actors—is crucial.
When Modi urges Indians to work from home or postpone a holiday, more is at stake than insulating the economy from the current shock. In a world where energy flows are contested, shipping routes are vulnerable, and capital markets are shaped more by geopolitics than macroeconomic fundamentals, India must leverage its relative strength to build long-term resilience against the next crisis.
Gaurav Dalmia is Chairman of Dalmia Group Holdings, a leading Indian investment company
Chetan Aggarwal is Founder CEO at AKR Consulting.
(Views are personal)