5 min readMay 19, 2026 04:02 PM IST
First published on: May 19, 2026 at 04:02 PM IST
The Prime Minister’s list of measures to curb consumption of imported goods, mainly gold and oil, somehow got named “austerity” in the public discourse. In Economics, the term is used somewhat differently in the context of a crisis. I shall return to it, having first considered the PM’s proposals.
Restrictions on imports are standard when a country faces a balance of payments crisis, leaving it starved of foreign exchange. In India, gold is the go-to store of value, reflecting the underdevelopment of financial instruments historically. Even where financial instruments for saving exist, the returns may not be inflation-indexed. Gold’s lure is that its value rises continuously with inflation. However, saving in the form of gold does not end up with investors. It is, therefore, a “curse” for the economy, as potential purchasing power gets locked up. There is also the additional factor that we produce next to no gold even as we display a voracious appetite for it. As the import of gold is a leakage of demand and it is not an input into necessary production, there is a case for reducing it.
The case of oil is altogether different. It is the quintessential intermediate input, entering production directly or indirectly. Thus, if there is less of it, it will lower output and employment unless efficiency rises or substitutes are found. The same is true of LPG supplies. It has been said that the current shortage has been forced upon India by the war in West Asia, but it is not clear that the government made any effort to secure oil from Russia and Iran, defying US President Donald Trump’s sanctions.
Be that as it may, there is no denying the potential hardships ahead. To avoid this, alternative sources of energy will have to be found. Domestically produced electricity will have to replace imported oil and gas. A shift to electric cars would be costly for India, for unlike China, it does not yet have the capacity to produce them at scale. But a shift to electricity for cooking is entirely feasible. However, it is not a choice that can be made from Delhi. Electricity is generated at the level of states. For decades, the state electricity boards have been forced to supply electricity cheaply to select groups. It is questionable whether they have the capacity to rapidly ramp up the supply needed to replace LPG.
The declining cost and rising availability of solar power in India, too, are irrelevant. The Kerala State Electricity Board, for instance, has conveyed that it does not have the funds to invest in the equipment needed to store the electricity generated by households. Such funds will have to be found, though, as geopolitics is likely to keep India under pressure. In fact, this is the perfect moment for India to strive for a dual energy transition, from foreign to domestic sources of supply and from fossil fuels to renewable energy sources. So, while the PM’s exhortation makes sense, the government must lay out clearly how energy from alternative sources can be found. The government’s regulatory bodies have also been far too lax in bringing automakers to heel by imposing energy efficiency norms for cars produced in India. It seems a war was needed for the government to even recognise the importance of energy security.
Finally, I turn to the macroeconomic aspect of austerity. The term entered the Economics lexicon from the debate in the 1930s between John Maynard Keynes and Friedrich Hayek on how to deal with the Great Depression (1929-1939). Austerity had meant a compression of aggregate demand, ostensibly to revive the economy. Keynes had thought of this as the wrong thing to do, for the Depression reflected a shortage of demand due to the collapse of private investment. Hayek acknowledged the reduction in output that would follow austerity initially but thought it necessary to compensate for the excessive demand that had caused the crisis. In India today, making do with less imported oil and cooking gas may be necessary but unless substitutes are found quickly, it is likely to lead to a loss of output. If such a loss materialises, it would come on the heels of a comprehensive slowing down of the economy that commenced even before the war in West Asia — in 2024, M Parameswaran and I estimated that of the 11 sectors at the initial level of disaggregation of national income, the majority had slowed after 2014, with only real estate growing faster.
Balakrishnan is the author of India’s Economy from Nehru to Modi: A Brief History
