The story so far:
Over the past week, a series of nudges, policy changes, and public messages have sought to influence the behaviour of Indian consumers, companies, and farmers. At the heart of this push is an effort to reduce India’s imports of oil and petroleum products, gold, and fertilizers, and involves everyone from the Prime Minister and his Cabinet colleagues to industry leaders and associations.
What was the Prime Minister’s message?
On May 10, during a speech in Secunderabad, 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 weather the storm created by the war in West Asia.
The Prime Minister asked Indians to prioritise working from home; reduce petrol and diesel usage by using public transport and electric vehicles; reduce the use of cooking oil; stop buying gold for at least a year; buy Indian-made products rather than foreign ones; pause foreign travel; and adopt natural fertilizers instead of using imported chemical ones.
The Opposition, along with several other commentators, questioned the timing of his appeals, coming as they did right after the conclusion of Assembly elections in some key States. Neither the political leadership nor the bureaucracy mentioned any impending problems in the run-up to the elections. The critics point out that in fact, the Prime Minister and several of his Cabinet colleagues flew across the country to campaign in Tamil Nadu, Kerala, West Bengal, and Assam, where they also organised several road shows. These questions relate more to the timing of the message than to whether remedial action is needed at all.
Why are these cutbacks needed?
It is now well established that the war in West Asia has created a global energy crisis. One of the aspects of this crisis is that the prices of oil and gas have shot up. A year ago, the price of Brent Crude — one of the benchmarks for oil — stood at $65 a barrel; it is now around $110.
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.
The war has also led to an increase in the price of gold as investors flock to it as a ‘safe haven’ asset in times of uncertainty. Indians have a cultural affinity for the yellow metal that defies any price movement. While 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. The value of these imports increased 24%. In other words, the higher price only impacted the demand for gold at the margins; the bulk of purchases has continued.
A third major trend is the depreciation of the rupee. The currency breached the ₹96-to-a-dollar mark on May 15 before closing a little higher at ₹95.96. 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 have been pulling out large sums from Indian markets. When they do this, they sell in rupees and are repatriated in dollars, creating another significant channel of dollar outflows.
Taken together, all this means that India’s Current Account Deficit (CAD) — the amount by which its imports of goods and services exceed exports — is set to grow to about 2.5% of the GDP in this financial year from 1.4% as recently as the quarter ended December 2025.
A sustained high CAD has several serious knock-on effects for the economy and has led to several crises for the Indian government since Independence. It is therefore clear why the government is seeking to act now to prevent such an outcome.
Has the government also taken some measures?
Over the last week, the government has taken several measures to support these efforts. Effective from May 13, it doubled the effective tax to be paid on the import of gold and silver to a total of 18.4% from the previous 9.2%. The Directorate General of Foreign Trade has also tightened the conditions under which gems and jewellery exporters can import gold duty-free. On May 16, the government also restricted the import of silver.
The prices of petrol and diesel were hiked on May 15 by ₹3 a litre each, in an attempt to reduce demand. The price of CNG was increased by ₹2 per kg. A rough calculation by The Hindu shows that this would earn oil marketing companies an additional ₹4,400 crore per month. However, this is not much when compared to the loss they are currently bearing, which the government said amounts to about ₹1,000 crore a day on petrol, diesel and LPG. This means further fuel price hikes could be imminent.
Notably, in a rare occurrence, Mr. Modi himself took to social media to deny a news report that the government was considering imposing a temporary cess on foreign travel.
Mr. Modi and several of his Cabinet ministers have also reduced the sizes of their convoys.
Will these steps work?
Several of the measures called for by the Prime Minister and implemented by the government might work at the margins, but some might lead to negative consequences as well. For instance, higher fuel prices may deter unnecessary travel, but unless offices implement a ‘work from home’ policy again, employees will have no option but to travel to work and bear the higher cost. Overall, higher fuel costs are inflationary in nature. Further, the diesel and CNG price hike is likely to make public transport costlier.
History has shown that higher gold prices do not necessarily deter purchases and can, in fact, lead to an increase in smuggling, as happened in 2013 when import duties were raised.
Asking farmers to switch to natural fertilizers and hold off on buying chemical ones is a workable medium-term strategy, but would be disruptive in the short term. Agricultural output, already expected to be under strain due to a below-normal monsoon and stronger El Nino this year, will suffer further.
An analysis by The Hindu has also shown that the growth in foreign spending by Indians is not on travel, which is contracting, but on foreign equity, debt, and immovable assets.
Short of draconian measures, there are few short-term measures that will effectively solve the CAD issue. Various governments have struggled to make India more competitive on exports. Unless that changes, and dollar inflows rise substantially, such crises are likely to recur.
Published – May 17, 2026 03:35 am IST
