The alarm button has been pressed. Import duty on gold and silver is the first step to counter the fire started by the US-Israel war on Iran. It's not often that the PM, principal secretary, economic adviser, energy minister and one of India's top bankers all warn about an impending crunch time in a span of hours. This means making precious metal imports more expensive is just the beginning.
Facing a crisis is a familiar script for many Indian policymakers, but this time around, the economy's standalone strength deceived many. What could go wrong for an economy that's acknowledged as the fastest growing by IMF and World Bank?
For years, India received capital flows that few emerging economies did. The inflation-targeting monetary policy appeared to have slain the inflationary demon that has been the root cause of previous crises.
The latest one proves that in a connected world, fault lines need not be within the economy but could emerge from anywhere. And it so happened with the blockade of the Strait of Hormuz. India's Achilles heel, the dependency on imported crude, is at play again. This rounds up the unholy trinity of capital outflows, and a collapse of free trade that powered economies like China, India and Bangladesh for three decades.
Currency, the visible barometer of an economy, is sliding at a rapid pace, down 6.1% this year - the worst performance in the region. If this trend is to be reversed, RBI, which has remained comfortable with inflation levels over the past few years, needs to prioritise financial stability over growth.
It must increase interest rates even if unwillingly to change the behaviour of importers who rush to buy and exporters who delay selling, causing the lead-lag distortion. India's inflation rate may not necessitate a rate hike, but the interest rate differential between the US and India has narrowed from more than 5 percentage points to about 2.5, calling on MPC to look beyond prices when setting rates.
Unlike China and South Korea, which built reserves through exports, India relies on capital flows. A plan to bring in US dollars needs to be stitched up, reserves adjusted for the forward book, and gold revaluation may be just around $500 bn, and not the $690 bn headline number. The market knows it too well. Waiting to reach a situation where the need for a swap line with the Fed arises may not be the best strategy.
When India resorted to a special deposit scheme after the taper tantrum in 2013, global rates were near zero or low because ECB chief Mario Draghi promised to do 'whatever it takes' to keep EU intact. This time is different. A similar programme is going to inflict a cost on the sovereign, which must be borne.
These and other measures, such as raising retail fuel prices and reducing the fertiliser subsidy, may bring in relief. But these are bandages. What is required is surgery.
While precious metals and crude dominate the import bill, nothing much could be done about gold and silver as curbs could lead to smuggling. Furthermore, it is illogical to persuade citizens to stop buying gold when central banks not trusting their own currencies are accumulating the yellow metal.
Crude addiction cannot be substituted with solar or wind. India's report card on oil and gas exploration has been abysmal. Its inconsistent policies have ensured that private capital gives it a miss. In the past decade, of the awarded 172 exploration blocks, there were just 14 discoveries, and only one is producing, and that too marginally.
When one looks at the potential, it's just the tip of the iceberg. S&P Global Commodity Insights estimates that the country holds an estimated 22 bn barrels of undiscovered hydrocarbon resources. Yet, nearly 70% of these reserves remain unexplored. The numbers may be deceptive - many of them may be in locations, like deepwater or ultra-deepwater, which require billions of dollars and advanced technology that only the likes of BP, Shell or ExxonMobil possess.
They may demand business terms that ensure profitability. GoI must bin its conservatism and get bold enough to roll out the red carpet for MNCs. Some of them may become unviable if oil prices fall, but New Delhi must treat them as a national priority and persist with them even if they would be loss-making when prices fall below breakeven in the short term.
If policies are designed with the long-term prism, this may turn out to be a good crisis.
