After contesting an extraordinarily lavish election in Bengal, prime minister Narendra Modi’s appeal to citizens for austerity by consuming less oil, gold, fertilisers, foreign travel seemed naturally alarmist and hypocritical for most thinking Indians. The manner of the PM’s communication of a “Covid type” crises was also very unwise. The stock markets crashed and the rupee has further weakened trying to digest the enormity of the PM’s appeal. India was the worst performing currency among major economies in 2025. It is also the worst performing currency in 2026 so far.In effect the PM was signalling to the world markets that one of the largest economies in the world was having a severe dollar shortage and wanted to curb dollar outflows of merely $16 to 18 billion that Indians spend annually on travelling abroad! Are we that badly off?For the global markets this sort of communication shows palpable weakness especially coming from the prime minister himself. Curbing gold purchases or foreign travel by Indians are best handled quietly by the Reserve Bank of India (RBI) which manages India’s forex reserves and the stability of the currency. In a globally integrated financial system, communication to markets is a very sensitive exercise. It can’t be done the way PM Modi chose to do it.Modi could have made a general appeal to Indians as done by other nations asking their citizens be prepared for the adverse impact of the US-Iran war. PM could have simply assured that the government would do everything possible to cushion the adverse impact of energy shortage. It was bad optics to detail the specific areas in which citizens must curb their spending. Effectively the PM was telling people to massively curb consumption across several sectors whose macro effect could well be to reduce the gross domestic product (GDP) by a couple of percentage points or more!It is possible the PM realised his mistake as a subsequent statement by the Petroleum minister suggested there was no shortage of fuel as such but prices needed to go up to reflect international crude prices. He said the oil companies were losing Rs 1,000 crore a day as they were absorbing the losses at present.So Indians must brace themselves for a retail price hike in petrol and diesel soon.Even worse was Modi’s appeal to farmers to shift to natural farming as far as possible. One, this cannot happen overnight and two any such move by farmers could drastically bring down food production as seen in Sri Lanka’s misadventure with organic farming in 2022 which led to a collapse of food production causing food riots which partly triggered mass protests and forced a regime change.What is really needed in the next few months is careful expectation management caused by supply shock the extent of which is still not very clear as the possibility of a peace agreement between US and Iran is alive. Trump’s China visit May 14-15 will bring more clarity in this regard. People are broadly aware that the US-Israel-Iran war will hurt all nations, especially more so in Asia, as 13 to 14 million barrels per day of oil has been off the market for two months now. Most nations have begun to tighten their belt. Nations with huge petroleum reserves, like China, are handling the crises much more calmly.India is more vulnerable for other reasons. India was already facing structural constraint in the external sector even before the Iran war. The Economic Survey three months ago had flagged two critical issues – that of the rupee “punching way below its weight” and the more serious problem of the “foreign investments shying away from India which needed to be examined,” the Survey said. India has been net foreign direct investment (FDI) negative for two years now and the foreign institutional investors (FIIs) have also been leaving India in droves in 2025 and now in 2026.Net FII outflows this calendar year as been $21 billion whereas many other emerging markets in Asia and Latin America have received impressive inflows as their stock markets have also performed well in spite of the war. Many leading India dedicated fund managers have recently lamented that India is not on the radar of foreign investors at all in 2026. A veteran hedge fund manager Samir Arora said he was at an investor conference in the US recently and he had never seen such apathy towards India. So India should brace for negative foreign investment flows this year. India has already been Balance of payment (BoP) negative for the last 2 years.Why is foreign investment so averse to India?This will be the third year of negative BoP performance. This has to be structural in nature. Why is foreign investment so averse to India? We need a comprehensive answer to this. One reason often speculated is that foreign companies are wary of the Modi government’s open bias in favour of Indian oligarchs. Other reasons include harsh regulations and taxes combined with draconian enforcement by investigative agencies. The net effect of all this is a worsening climate for foreign investments. It is another matter that even domestic private investments are weak for many years now. This is a singular failure of Modinomics.So the problem of a weakening external sector outlined in the Economic Survey has clearly aggravated after the US-Iran war.Suddenly India’s forex reserves which seemed comfortable at $720 billion in early February is down to $688 billion now. Economists suggest that the actual liquid forex reserves which can be used to stabilise the market in the event of an attack on the rupee is less than $ 500 billion. This is because Gold and SDR constitute about $ 100 billion and RBI’s obligations to meet forward dollar contract requirements would be another $90 billion.So, with less than $500 billion of forex reserves, which cover about 7 to 8 months of our annual imports , India is in a similar situation as in 2013 when the rupee suddenly crashed over 20% in just a few months and the RBI governor Raghuram Rajan had to take extraordinary measures to shore up the currency . The RBi invited NRI deposits at high interest rate combined with exchange rate protection, normally done as an emergency measure.News reports suggest the RBI is already considering such extraordinary measures to restore confidence in the potentially deteriorating external sector.In 2013 India was clubbed with the other BRICs nations as “Fragile 5” which Modi fully exploited in his campaign against the United Progressive Alliance (UPA). As if showing him a mirror, his speeches on the falling rupee during the UPA period are being played by his adversaries now.There is little doubt that India is probably among the most vulnerable economies today. A senior economist who advised the Modi government says in 2013 India was among the “Fragile 5” nations but today it probably stands apart as “Fragile 1”. Indeed there seems to be a consensus among global economists and fund managers that India is probably the most affected major economy post the US-Iran war.