Austerity plus

Save forex on fuel and gold, but also push through reforms to accelerate growth

PM’s appeal to curb fuel use through public transport, and shun gold buying for a year, is timely. Hormuz Strait has been closed for almost 75 days now, roughly 20% of world’s fuel supply has been cut off, and global fuel prices have been at least 50% higher than Feb levels.

India hasn’t passed on the difference to consumers so far, but business as usual is straining rupee, forex reserves, and overall economy. As for gold, it’s a discretionary spend, so buying less of it now will ease those pressures somewhat.

Question is, can public austerity offset the Rs 30,000cr monthly loss on account of oil and gas? We have earlier argued for delaying fuel price hikes, to keep inflation down, but Iran’s latest terms to lift the blockade suggest this crisis won’t end soon.

By seeking war damages, and “sovereignty” over Hormuz Strait – what Trump calls “totally unacceptable” demands – Iran’s shown it’s willing to bear pain, as long as it emerges from this war looking stronger, not beaten.

That’s a problem for Trump, and everyone else, too. For India, this uncertainty makes a fuel price hike inevitable, so PM’s speech should be read as a warning shot.

But austerity moves can be double-edged. Not flying abroad hurts airlines. Buying less fuel hurts pump operators, who earn a fixed commission per litre. Likewise, not buying gold means hardship for big and small jewellers, and their staff. That’s why we need other policies to get through this crisis.

Take gold, for example. If we mobilise a tiny part of our household gold hoard – 35,000 tonnes – the jewellery business can keep going without fresh imports. What’s needed is institutional gold buying that’s safe, fair and easy.

If a long stalemate in Hormuz causes economic slowdown, GOI should be ready to step up infra spending. It might add to inflation – which is anyway bound to rise with higher fuel prices – but right now, maintaining the growth momentum is crucial.

Alongside, long-delayed economic reforms should also set rolling. PSU disinvestment is the lowest hanging fruit of all.

As Economic Survey pointed out, while in-principle approval for disinvestment in 36 CPSEs has been accorded since 2016, only 13 have been disinvested.

After two more resounding wins in major state elections, BJP has immense political capital to carry out these reforms. If it waits longer, it may lose the opportunity as UP polls draw near. The plans already exist, what’s needed is prompt action.

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