Let us begin with some numbers — sadly, we cannot escape them. Since the Iran war began, global crude prices have gone up by 50%. Meanwhile, the rupee has slid from Rs 91 to a dollar to Rs 95.70 at the time of writing these words. Add to this, the fact that Foreign Institutional Investors (FIIs) are taking their money out at an alarming rate, and you will understand why we are in a right royal mess.
Before the war began, we were all worrying about how AI will eat up jobs, especially white-collar IT jobs that India’s middleclass depends on. Now the war has added one more thing for us to worry about.
That is what economists call the Current Account Deficit (CAD). That is the difference between what we earn from exports, what Indian companies earn doing business abroad, and Indians living abroad send home, and what we spend on importing goods and services.
There is nothing wrong with running a Current Account Deficit, especially for developing countries like ours.
Such economies have to import machines, equipment, energy and other inputs, to build capacities. And, during the development stage, countries like ours, will not be able to match our import bill through exports or income transfers. In our case, a high import bill is also unavoidable, because we import 80% of our crude oil needs. After all, that is what fuels our economic engine.
But a big part of our CAD is also because we import a lot of gold. Not just the average Indian, but increasingly also the Reserve Bank of India, which has been trying to reduce its dollar dependence by converting it
into gold.
Now, unlike other assets, gold has no productive use. People buy it because it has been traditionally seen as a store of value. The demand for gold has shot up in the past couple of years because the rich are worried that other (productive) assets will not give them good returns, and also because the dollar is fast losing its dominance.
In India, the benchmark Nifty 50 has given virtually zero return in the past two years; real estate prices have been stagnant for over a year, and in some cases fallen in the past few months; even fixed deposits have left very little on the table after taxes. So, it is but natural for the affluent, to buy gold with their savings.
When we buy gold or crude oil, we spend dollars. Normally, this would not be a problem if FIIs had been flocking to our markets, and flooding our economy with dollars. Right now, the exact opposite is happening — FIIs are steadily selling Indian financial assets.
So, there is a double demand for dollars — from Indian importers and from foreign investors selling and exiting India. Naturally, this has driven the rupee drastically down in the past year. Last year, around this time, you could buy one US dollar for Rs 85, now it is on its way to Rs 96.
The Iran war has come as a double whammy. Right before the war began, we were buying crude oil at an average price of $70 to a barrel. And back then, the rupee was trading at Rs 91 to a dollar. So, a barrel of crude cost about Rs 6,370. Today, we are buying crude at $105 per barrel.
At the current exchange rate, it is Rs 10,000 per barrel. In dollar terms, crude oil costs 50% more, but in rupee terms it has gone up by 57%.
So, we are not only facing a higher dollar import bill because of the Iran war, but an even higher rupee import bill, because the rupee is weakening.
That is why, economists, including the government’s Chief Economic Advisor, V Anantha Nageswaran, are warning that our Current Account Deficit could more than double, from less than 1% of GDP to more than 2% in 2026-27. This is the most severe economic stress test that the Modi government has faced since it first came to power in 2014.What is the solution?
The Modi government seems to believe that the best route is middle-class austerity. So, the Prime Minister has called upon us to use less petrol, carpool wherever possible, not go on foreign holidays, work from home, not buy gold for at least one year, and even use less oil in our food. (The last one is because we also import a lot of oilseeds and edible oil).
So, the onus is on the middle class to do its patriotic duty and consume less. It is true that India’s affluent consume far too much fuel. On every road, you will find cars with only one person in it, sometimes a professional driver who is on his way back after dropping their employer to work or their children to school. Yes, we Indians are very fond of gold.
But one must ask the question — why should the middle class be the only ones to sacrifice? Why is there no windfall gains tax levied on exporters who are making hay because the rupee has weakened?
Why was no tax levied on oil marketing companies for the massive gains they made when they were buying highly discounted crude from Russia? Why are there no curbs on the freebies distributed by governments to win elections?
India’s white-collar middle class has already faced the worst of the economic slowdown in the past few years. Estimates by the World Inequality Lab show that those earning between Rs 1 to Rs 1.5 lakh per month post-tax have seen their real incomes grow at a measly 1.0-1.5 percent per year in the past 5 years.
They are already facing job losses due to AI, and many have been eating into their savings to pay their medical bills and their children’s school and college fees. Once again, they are being asked to sacrifice, while no one else is affected. It is inevitable in a way. After all, the middle class is worth nothing in electoral calculations.