Prime Minister Narendra Modi has called upon Indians to adopt a new era of economic austerity, urging citizens to curtail non-essential spending and activities as the nation grapples with the escalating economic fallout from the ongoing conflict in Iran. In an appeal reminiscent of the pandemic era, Modi encouraged working from home where possible, avoiding foreign travel, reducing gold purchases, and consuming less fuel, framing these actions as vital for national economic survival.

India’s economy faces significant vulnerability due to its heavy reliance on energy imports, sourcing approximately 90% of its crude oil and half of its gas needs from abroad. The sustained closure of the Strait of Hormuz, a critical global oil chokepoint, for over two months has drastically inflated India’s import bills by billions of dollars. This has translated into tangible impacts for consumers, with airfares surging due to rising fuel costs and overseas holidays becoming considerably more expensive. In response, the government has also targeted gold imports, a consistent drain on foreign exchange, by sharply increasing import duties on both gold and silver to 15%.

Beneath the Prime Minister’s direct appeal lies a growing concern in Delhi: while India’s foreign exchange reserves remain robust at around $690 billion—sufficient to cover 11 months of goods imports—the demand for dollars is beginning to outpace supply at an uncomfortable rate. Financial experts, including veteran Indian banker Uday Kotak, have cautioned the nation to “prepare for the worst.” Economist Rajeswari Sengupta of the Indira Gandhi Institute of Development Research suggests that what initially appeared as a temporary shock could evolve into a prolonged crisis, potentially making India one of the most affected economies. Analysts from Nomura indicate that pressure on government finances is reaching a tipping point, leading to less appetite for further rupee depreciation and an incremental sharing of the adjustment burden with consumers. Indeed, India’s forex reserves have seen a decline of $38 billion since the conflict began, while foreign investment inflows weaken and exports slow, contributing to the rupee becoming one of Asia’s weakest-performing currencies this year.

Policymakers are navigating the delicate balance between managing external accounts and preventing further weakening of the rupee, a challenge highlighted by India’s chief economic adviser, V Anantha Nageswaran. While the government initially absorbed global price shocks, holding back pump price hikes for two months during state elections, it recently raised petrol and diesel prices for the first time in four years. Economists argue that shielding consumers entirely from global supply shocks is unsustainable, advocating instead for targeted relief, such as wartime-style subsidies for poorer households, particularly for cooking gas, while allowing market prices to adjust for others. With inflation already showing an upward trend, as described by HSBC as the “calm before the climb,” the long-term economic adjustments are becoming increasingly unavoidable.