Austerity plus

The Prime Minister’s request to people to use less fuel by taking public transport, and to avoid buying gold for a year, comes at an important time.

The Hormuz Strait has been blocked for almost 75 days. Because of this, about 20% of the world’s fuel supply has been affected, and fuel prices around the world are much higher than they were in February.

India has not raised fuel prices for consumers yet, but this is putting pressure on the rupee, India’s foreign exchange reserves, and the economy. Buying less gold could also help, because gold is not something people urgently need.

But can people saving fuel really make up for the huge monthly losses caused by expensive oil and gas? Earlier, it made sense to delay fuel price hikes to keep inflation low. But now, Iran’s demands to end the blockade show that this crisis may continue for a long time. Iran wants war compensation and more control over the Hormuz Strait.

Former US President Donald Trump has called these demands “totally unacceptable.” Iran seems ready to suffer losses if it can come out of the conflict looking stronger. This creates problems not just for Trump, but for the whole world. For India, it means fuel prices will probably have to go up soon. The PM’s speech may be a warning that tougher times are coming.

Still, austerity, or cutting down spending, can also hurt businesses. If people stop flying abroad, airlines lose money. If they buy less fuel, petrol pump owners earn less because they get paid per litre sold. If people stop buying gold, jewellers and their workers suffer too. So India also needs other policies to handle this crisis.

For example, India has around 35,000 tonnes of gold stored in homes. If even a small amount of this gold is brought into the system, jewellers could keep working without importing so much new gold. The government should make it easy and safe for people to sell or deposit their gold.

If the Hormuz crisis continues and slows the economy, the government should spend more on building roads, railways and other infrastructure projects. This may increase inflation, which is already likely to rise because of higher fuel prices. But keeping the economy growing is very important right now.

At the same time, the government should finally push ahead with economic reforms that have been delayed for years. One easy step is selling stakes in government-owned companies. The Economic Survey noted that since 2016, the government approved privatisation plans for 36 public sector companies, but only 13 have actually been sold.

After recent election victories, the BJP government has strong political support to carry out these reforms. If it waits too long, especially with Uttar Pradesh elections coming closer, it may miss its chance. The plans are already there — now the government needs to act quickly.