Wars are fought by someone else, but it is the common people and investors who suffer the losses — meaning those who are not at fault end up paying the price. The recent military confrontations between Israel, Iran, and the United States have once again intensified the debate over the legality of the use of force under international law. Although much of this discussion focuses on compliance with Article 2(4) of the United Nations Charter, an equally important question is often ignored — who bears the economic cost of unlawful use of force?
Since the closure of the Strait of Hormuz, fears have been expressed that India too could face shortages of oil and gas. Institutions that assess the country’s economic health — the Reserve Bank, Moody’s, S&P, the World Bank, Fitch, and the Asian Development Bank — have reduced India’s GDP growth rate forecasts. Clearly, there has been a contraction in our economy. In any case, India is now not the world’s fourth-largest economy but the sixth-largest. There are signs of further decline as well.
This assessment is the first indication of an impending economic crisis. The Prime Minister himself acknowledged that while the coronavirus pandemic was a global crisis, the Iran war is the biggest crisis of this decade. The Prime Minister is in favor of reducing imports so that foreign exchange reserves can be saved. At the beginning of the Iran war, India’s foreign exchange reserves stood at $720 billion, but after nearly 75 days of war, these reserves have declined to $690 billion. Therefore, the Prime Minister has appealed to reduce those expenditures that require spending dollars. Nearly 80 percent of crude oil and more than 70 percent of gold imports are made in dollars.
The historic fall of the Indian currency, the rupee, to 95.28 against the dollar has deepened the crisis. At present, the rupee is the world’s second weakest currency, having depreciated by 12 percent. Due to expensive crude oil, India is being forced to spend an additional ₹1,619 crore every day. The import bill includes ₹1.86 lakh crore spent on edible oil and ₹1.38 lakh crore on fertilizers. Prices of urea and DAP fertilizers in the market have doubled. Former Chief Economic Adviser Arvind Subramanian has issued a warning. According to him, India’s economic challenge is not a foreign exchange crisis.
Instead, it is a “crisis of affordability and livelihood.” If the Iran war drags on, it could become even worse. According to him, conditions are likely to deteriorate further before improving. He has supported PM Modi’s appeal to people to save more. The veteran economist said that the current energy crisis is already putting pressure on households and livelihoods. This has happened due to rising fuel prices worldwide. He said, “This is not a foreign exchange crisis. We have reserves of $700 billion. It is not that we cannot buy things.
This is a crisis of affordability and livelihood because prices are bound to rise. Livelihoods will be affected because of this.” Subramanian said that policymakers should focus less on attracting foreign capital and more on how the burden of rising energy prices can be shared across all sections of society. He said, “The challenge is how the burden of this crisis can be shared fairly and equally among all sections of society. Rising prices of fuel, gas, and fertilizers will hurt poor families and farmers unless the government takes steps to reduce the impact.” Why is private investment still weak? Kotak Mahindra Bank founder Uday Kotak has warned that people should prepare for “extremely bad circumstances.” However, India is not the only country doing this.
After the war began, several countries took many measures to reduce the impact on consumers and their economies. China ordered its oil refineries to temporarily stop fuel exports. Some states in Australia promoted public transport to encourage people to drive less. The Philippines declared a national emergency in March. Sri Lanka has also implemented fuel rationing. “If India is such a good place for investment and, as claimed, we are growing at a rate of 7.5–8 percent, then why are people not investing?” India is projecting strong growth, while foreign direct investment (FDI) and private investment continue to remain sluggish.
He appealed for mission-mode efforts to revive private investment and improve export competitiveness. We should learn from those states that have successfully attracted private investment. States in South India have attracted considerable investment from China. We must also examine what policies they adopted to attract investment. Concerns regarding agriculture also remain. Temperatures are extremely high, and the impact of El Niño may certainly be felt at least during the winter season. Therefore, we must definitely be prepared for the possibility that conditions could worsen further.
There are signs of an economic emergency, and the Government of India may take some more strict and major decisions in the future. Certain restrictions may also be imposed. In this time of crisis, the public too will have to act with restraint and prioritize frugality.
