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By:

Amey Chitale

28 October 2024 at 5:29:02 am

The Iran Crisis and India’s Gathering Fiscal Storm

As the war in West Asia continues to drive up crude prices and fiscal pressures, India’s economic resilience is being severely tested. AI generated image It has been nearly three months since the West Asian conflict began, and its ripple effects are striking us harder than the scorching summer sun in the subcontinent. The unfolding situation has already shaken the government’s risk management framework. For years, India benefited from a prolonged “Goldilocks” phase of economic stability,...

The Iran Crisis and India’s Gathering Fiscal Storm

As the war in West Asia continues to drive up crude prices and fiscal pressures, India’s economic resilience is being severely tested. AI generated image It has been nearly three months since the West Asian conflict began, and its ripple effects are striking us harder than the scorching summer sun in the subcontinent. The unfolding situation has already shaken the government’s risk management framework. For years, India benefited from a prolonged “Goldilocks” phase of economic stability, which helped cushion temporary disruptions. Yet no modern economy is built to withstand relentless external shocks whether from unending wars or recurring natural disasters. Growth flourishes only in an environment of peace and stability. India’s vulnerability to turmoil in West Asia is hardly new. From the oil shocks of the 1970s to the Gulf War of 1991 and the Iraq conflict of 2003, every major disruption in the region has rattled India’s balance of payments, fuelled inflation and forced difficult fiscal trade-offs. Despite decades of diversification, the Indian economy remains deeply exposed to the geopolitics of energy chokepoints such as the Strait of Hormuz. Cost Cutting With the conflict unresolved, Prime Minister Modi has urged citizens to practice self-restraint, reviving COVID-era habits like remote work, virtual meetings, reduced travel, and deferring gold purchases. These steps aim to cut fuel imports, ease transport inflation, conserve foreign exchange, and safeguard India’s Rs. 690 billion reserves. Digital operations and limited travel also lower congestion, emissions, and business costs. By curbing crude demand, the country can soften inflation and free resources for infrastructure and welfare. This demand-side discipline complements RBI’s interventions, offering immediate relief while renewable transitions remain long-term. Its success depends on how faithfully citizens adopt it. To curb inflationary pressures, the government reduced excise duties on petrol and diesel to offset soaring crude oil prices and kept fertilizer costs in check despite conflict-driven surges. These measures, however, have strained public finances and derailed the 4.3 percent fiscal deficit target. At its 623rd meeting in Mumbai, the RBI Board approved a record surplus transfer of Rs. 2.87 trillion to the Central Government for FY2025–26, surpassing last year’s payout of Rs. 2.69 trillion. This marks the highest dividend in the bank’s history, offering temporary fiscal support amid severe external shocks and reinforcing the RBI’s role as both monetary authority and stabilizer. The payout reflects strong financial performance, with net income before provisioning rising 26.3 percent from Rs. 3.13 trillion in FY25 to Rs. 3.95 trillion in FY26. Expenditure grew 27.6 percent, gross income 26.4 percent, and transfer to the Contingent Risk Buffer (CRB) surged 143.8 percent to Rs. 1.09 trillion. The RBI’s balance sheet expanded 20.6 percent to Rs. 91.97 trillion. Strategic Interventions This surplus was driven by strategic interventions and favourable global dynamics. Large-scale forex operations - nearly $180 billion sold to defend the rupee - generated trading gains as dollar holdings were liquidated at high valuations. Elevated global interest rates boosted returns on foreign debt and currency assets, while a 10 percent dollar depreciation and 60 percent gold rally enhanced reserve values. Domestically, Rs. 9 trillion in government securities purchases expanded the balance sheet and interest earnings, while sovereign swaps moderated currency depreciation. Under the revised Economic Capital Framework, the CRB was set at 6.5 percent of the balance sheet, down from 7.5 percent, to maximize surplus transfer during geopolitical stress. With the balance sheet expanding sharply, this required a larger nominal allocation of Rs. 1.09 trillion. A higher buffer would have reduced the dividend, while a lower one could have unlocked over Rs. 3.5 trillion but would have left the RBI exposed. The chosen balance safeguards resilience while still delivering a record payout. This payout provides crucial non-tax revenue support to the Government. In the Union Budget, total dividends from PSUs, banks, and the RBI were projected at Rs. 3.16 trillion. The current payout amounts to 90.8 percent of the projections. While PSU banks like State Bank of India and Life Insurance Corporation of India add would receipts, falling oil PSU dividends will be offset, keeping the budgeted targets intact. Yet fiscal strain persists. To shield farmers, the government-maintained urea price controls, absorbing global cost increases. As a result, the fertilizer subsidy bill for FY27 is projected to rise by Rs. 70,000 crore to Rs. 2.41 trillion marking a 40 percent jump, thereby offsetting gains from the RBI’s record transfer. The full impact of the ongoing war is yet to unfold, but it is already clear that the government will miss its fiscal deficit target of 4.3 percent, which was premised on average crude oil prices of $85 per barrel. Every $10 increase in crude prices widens the deficit by about 40 basis points. With crude currently hovering around $100, the fiscal strain is expected to be considerably higher, pushing the deficit well beyond initial projections. Alternative Measures As the evolving global scenario is beyond India’s control, several policy adjustments merit attention. First, sourcing and supply chain diversification should be deepened by maintaining the shift toward Atlantic Basin crude and Russian imports, while securing long-term LNG and fertilizer feedstock agreements outside the Strait of Hormuz. Second, the continuous pursuit of the reform agenda remains essential. Third, dynamic subsidy management and exploration of direct benefit transfer options for subsidy disbursement are necessary. The government should also concentrate on accelerating adoption of high-efficiency alternatives like Nano Urea that can reduce bulk chemical imports and ease fiscal pressure without undermining crop yields. On the monetary front, RBI’s use of its Rs. 690 billion reserves and swap operations has helped moderate currency volatility, but persistently high crude prices above $120 per barrel and continued rupee weakness may necessitate policy rate hikes to anchor inflation expectations. Aligning these monetary measures with government-led energy conservation is vital to safeguarding India’s external balance and macroeconomic stability. The trajectory of the West Asian conflict is in uncertain terrain. Even in the best-case scenario of hostilities ending soon and the Strait of Hormuz reopening, supply chains would take at least three months to normalize. This disruption has already slowed India’s growth momentum in the first half of FY27, posing a significant hurdle to the Viksit Bharat mission. The ongoing crisis has once again exposed structural fault lines in the way India’s economy has evolved. While the country has shown resilience against international pressures, it remains far from achieving the kind of global economic dominance that China commands. The government continues to push forward with reforms, but these efforts have yet to gain the full traction and recognition they deserve. Amid these challenges, RBI’s strong institutional framework has proven to be a critical shield, helping stabilize the economy during external shocks. Without a realignment and reinforcement of the domestic ecosystem, the vision of a Viksit Bharat will merely remain an aspirational one. (The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)

Bharat’s Jetson Cities, Light-years Away from Nature

Updated: Jan 20, 2025

Jetson Cities

One thing is for certain: our Bharatiya cities, the big metros and towns, are fast becoming like the ‘Jetson’ cities. For those who are unaware of Jetson cities, these were first shown in the famous Hanna-Barbera cartoon series, the Jetsons, set in the 2100s, where cities are air-tight glass globules tethered to the ground, and the only way to get in and out are the flying cars. Yes, we, the city-dwellers, aspire to tall skyscrapers, spectacular bridges, world-class tunnels, swooshing metro trains, and we are building Jetson-like flying cars. A few HD drone images here and there, during the day and at night and around twilight, and we are content that our cities have become the cynosure of our own eyes. We want our cities to be brightly lit, with neon signs, laser shows, and large billboard videos. We would then fulfil our inner desire to have a city on par with Tokyo, New York, and Shanghai.


Our buildings, designed for the next 30 years, are well air-conditioned, shielding occupants from a soupy dust bowl of brown smog, soot, particulate matter, and fine dust. It is said that most new home buyers invest at least 10% of their property’s price in enhancing the interiors, soundproofing their homes, using air purifiers and conditioners, and disconnecting from the outside world for that much-needed solace. Indeed, large builders promote their projects as close to nature amidst tranquillity. However, there is always another builder eager to get one plot of land ahead of yours to enjoy that nature. To be truthful, access to nature now comes at a premium - even the skies.


Let’s assume the working-age population is occupied in the leisure of our Jetson cities, but how many of their young school and college-going kids have seen the long arm of the Milky Way galaxy from their cities? How many have witnessed a comet zooming by? How many know about endemic plants with medicinal properties? When did they last see a chirping house sparrow? How many know that the nearest sewage drain was once a freshwater stream? When did they last find their suburban beach prettier than the resort beaches of Maldives?


The intent to ask these questions is simple: Bharat is currently at a crossroads. Pundits are enthusiastic about a cultural renaissance on the horizon. Corporate leaders, on the other hand, want us to invest hundreds of hours each week to pay our dues to the growth of the national GDP. But no one asks, if a cultural renaissance is to occur, who will generate the new understandings and insights of nature that arise typically during such a period of human advancement? No one is actually asking, for whom are we building the nation if there is no time for children, or worse, if there is no time or intent to have children. In the process of growing rich, we are about to become old. By 2047, 65% of the population under the age of 35 will grow beyond 35 all at once, and we’d have an enormous population in advanced ages with a tapering young population, a graph that looks like a banyan tree. Unfortunately, that young population will have no access to the knowledge that nature has to offer, neither flora and fauna nor the seas and the skies.


Our urbane lifestyles need tempering. Such tempering can occur only if we ensure the revival of natural sciences during this period of cultural renaissance and nation-building. Let’s not rely solely on the educational system. With Indian Knowledge Systems, constructive changes are underway, and academic curricula are poised to improve for the greater good. However, true knowledge arises only when parents and grandparents introduce children to nature. Genuine understanding also develops from extracurricular activities in schools and colleges that encourage kids to observe, journal, and act on their discoveries. On the positive side, our country’s forest cover is increasing, as announced by the government. However, efforts must be made to ensure that every school or college, whether in Mumbai, Vijayawada, Gorakhpur, Ratlam, Thrissur, Bhuj, Faridabad, Imphal, Manali, Cuttack, or Ajmer, guarantees that their students are well aware of the endemic nature of their surroundings and are regularly observing and recording data on whatever interests them. Let kids observe rivers and understand the volume of water that flows through them. Let children learn about the decline of house sparrows in their cities and what steps should be taken to revive their populations. Let them study the bees in their nearby groves and recognise the vital role these bees play in nature.


Of course, you need to learn AI, robotics, fintech, the next generation of management courses, and all the engineering bells and whistles. However, we must not leave the next generation with inadequate comprehension and skills for understanding nature. We must ensure that nature conservation is not merely lip service or a tool for politicised green activists. This can be achieved if natural sciences are given the respect they deserve at the school, undergraduate, and postgraduate levels.


Indeed, I am a plebeian, and you might feel that you, too, could write a rant about the plight of our urban lives. Urban development and municipal experts have many solutions to propose, but few are willing to take action. However, that is not the issue I wish to highlight. I aim to illustrate a much larger concern—that Indian city dwellers are disoriented and devoid of nature, lacking a guiding star to lead them toward a brighter future. Our cities of Mumbai, Delhi, Bengaluru, Ahmedabad, Kolkata, and Chennai have taken on characteristics reminiscent of Jetson-like cities. We show little regard for the Nagar Devata, Gram Devata, and Van Devata, who have protected the cities, towns, and forests that once surrounded us. We wait for formal governance to clean up our beaches, rivers, and ponds without making sufficient efforts to prevent pollution in the first place.


For those striving to grasp spirituality not through the Puranas and Aadi-Granth but through new-age podcasts, I recommend watching Vinay Varanasi’s podcast on Bhagavan Vishnu’s Dashavatar. If it is clear that Bhagavan Vishnu does not tolerate disregard for Bhudevi or Mother Earth, why do we, the devotees of Bhagavan Vishnu, continue to pollute our Mother Earth—her air, soil, waters, and sounds? Or have we taken Elon Musk's words at face value, assuming our next destination is Mars after destroying Earth, only to ruin Mars later, even worse than its current clinically sterile state? If that is the case, then bear with me when I say this: these Jetson cities stand on precarious pillars of ego, victimhood, apathy, and consumerism, waiting to be toppled either by the true harbingers of order or by false prophets. Therefore, teach the next generations to observe nature, appreciate our coexistence with other species, and venerate the forces of nature. By doing so, we humans will be good, at least for the next thousand years. If not, prepare for a bleak future by the end of this century.


(The author is a Space and Emerging Technology Fellow at the Centre for Security, Strategy and Technology, Observer Research Foundation, Mumbai. Views personal.)

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