PM Modi’s call for austerity measures: Prime Minister Narendra Modi’s call for austerity measures did not go down well with stock investors, although analysts noted that several Asian economies, including South Korea, Indonesia, Myanmar and Vietnam, have already urged citizens to curb fuel consumption or announced strict measures to reduce fuel usage. PM in his speech on Monday urged citizens to postpone non-essential foreign travel, import of gold and fertilisers to conserve foreign exchange reserves.
As to why the market panicked, a couple of brokerages went into details. JM Financial said India’s forex reserves are currently comfortable at $690 billion, covering 11 months of imports. But if the supply disruption extends for a few more weeks, it would warrant tangible measures, JM Financial warned.
“Hence, we believe that the PM’s call for conserving forex reserves is a precursor to actual austerity measures in the coming weeks if the conflict does not end,” it said.
JM Financial noted there is no end to the Iran conflict in sight and, thus, believes investors should brace for austerity measures.
“The PM’s speech was an appeal to citizens, and none of these measures are mandatory. However, they are an important signal and the first of such since the start of the Iran war. India’s reference to work-from-home/car-pooling have come much later than what we have seen across many other Asian economies,” Nomura India said.
The foreign brokerage said the speech is a signal that the government is preparing citizens for a
potential move forward with some policy announcements in coming weeks to reduce the pressure on the twin deficits. These measures could take various forms.
The first could be disincentivizing non-essential imports like gold, and may include a potential hike to the customs duty on gold imports. Nomura, however, noted that gold shipments have been stuck at customs since March, owing to administrative delays.
“Second, tighter rules under the Liberalized Remittance Scheme (LRS) could be announced. Under the LRS, residents are allowed to freely remit up to USD250,000 abroad annually for the purpose of foreign education, travel etc,” it said.
JM Financial said a section of the market was already anticipating fuel price hikes immediately after the election results were out, but the government does not seem to be in panic mode. Even as crude oil price spiked 80 per cent to $120 per barrel, petrol and diesel prices were unchanged.
“Only prices of bulk diesel (25 per cent to Rs 109.8/litre) and commercial LPG (up 78 per cent to Rs 3,024/cylinder) were hiked. We expect the government to follow a gradual approach; hence, fuel price may be increased in tranches, LRS limits may be reduced temporarily, and duty on gold imports may be hiked as the lean wedding season approaches,” it said.
It said PM’s focus was on conserving forex reserves by reducing use of imported commodities like petroleum products, gold and fertilisers in addition to curtailing spending on international travel.
Noting that oil accounts for 20 per cent of India’s total imports, gold for 9 per cent and fertilisers for a manageable 2 per cent, it added that close to 58 per cent of the total remittances — which stood at $30 billion FY25, under the Liberalised remittance scheme (LRS) have been for international travel, up from 35 per cent in FY19.
“Remittances for investments in equity is another category that has more than doubled to 8.4 per cent versus 3.1 per cent in FY19. It is pertinent to note that the share of spending on studies has drastically fallen since FY19 to 8.2 per cent versus 26 per cent in FY19, and “maintenance of relatives abroad” has reduced to 12% in FYTD26 versus 20 per cent in FY19,” it said.
Antique Stock Broking, meanwhile, met with few senior government officials, including former policymakers, in Delhi to understand India’s evolving macro-economic outlook.
It concluded that macro risks remain tilted toward higher inflation and lower growth, particularly if energy disruptions in West Asia persist and monsoon turn out to be below normal.
Availability of energy supplies is not a constraint, however prices may remain elevated at least till September, it noted adding that officials refrained from providing any indication on price hike on petroleum products.
“However, we believe that government may opt to bear the bulk of the brunt, while consumer and companies may also face some implications; d) Officials are not concerned about sustained loan growth exceeding deposit growth (but may result in lower margins) and private capex revival may get delayed given heightened uncertainty,” it said.
JM Financial believes the the government should continue to address these issues through coordinated fiscal and monetary policies. “We believe that the PM’s speech should be considered as market signalling before the actual measures are announced in the coming weeks if the conflict continues. Such fiscal and monetary measures would cushion the currency (INR) from further depreciation. On a prescriptive note, the government should focus on increasing strategic petroleum reserves to manage such supply disruptions,” JM said.
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