The government has woken up to the impending challenges facing the Indian economy. On May 12 – 73 days after the war started in West Asia – the prime minister announced seven steps to deal with them. Due to the gravity of the situation, new steps are being declared daily, the latest being the increase in prices of petroleum products. The seven measures are to promote austerity and import substitution. Purchase of gold, foreign travel and destination weddings abroad are to be shunned. People should shift from private to public transport and work from home on some days. Exhortation to buy Indian products is an import substitution step. These steps would conserve energy, which is in short supply, and save foreign exchange that is rapidly flying out of the country. Foreign exchange reserves have declined by $30 billion since late February, causing the value of the rupee in relation to the dollar to decline from Rs 91 to about Rs 96, i.e., by 5%. This is adding to the inflationary pressure.The closure of Strait of Hormuz has caused a supply shock in the world. That this could last a while was likely since the war in Afghanistan, Iraq, etc., went on for years. Iran is a big country with considerable resources and was unlikely to capitulate without a fight. In spite of the devastating bombing by both the US and Israel, Iran has defended its sovereignty and has not surrendered to US diktats.Energy equationFossil fuels as a whole (oil, coal, and natural gas) are a source of about 80% of total world energy. The share of oil in energy supply is 30% while the share of oil products in energy consumption is even higher at 40%, in 2023. Global oil consumption hovers around 102 million barrels per day and 20% of that came from the Strait of Hormuz before February 28. So, effectively 6% of the global supply of energy stopped. This is a big global shortage and prices of crude and gas rose sharply. This shortage directly impacts output and prices. India is particularly hit hard since petroleum products accounted for approximately 25-28% of Total Primary Energy Supply (TPES). Coal meets about 50% of the energy needs. India has large coal reserves but imports almost 90% of its crude requirement. But it exports 25-30% of finished petroleum products. The 6% shortage of global supply meant a higher percentage shortage for India. In February 2026, just before the war started, India imported 90% of its crude oil and 53% came from West Asia. And, 50% of LNG and 60% of LPG was imported and 60% of the former and 90% of the latter came from the Gulf area. So, for India, availability of 47% of crude, 30% of LNG and 54% of LPG were impacted. Such a shortage cannot be made up by other means; not in the short run.According to the Ministry of Commerce, in April 2026, import of petroleum, crude, and products, were down 10% year-on-year though 53% higher compared to March. So, import of crude in March was 59% of the pre-war import. But, export of refined products not only continued, it increased to 35% in April. These two together imply that crude being used for home consumption dropped sharply. Since prices were not changed, consumption continued as before. Thus, crude oil reserves for refining for home consumption would have declined sharply since March, thereby impacting India’s energy security. No wonder, now that elections are over, panic buttons are being pressed.The crude and finished produce that may be in the pipeline in various stages may total 60 days of stocks as per the government. But refineries keep about a week of crude supply. This can be supplemented by a small 9 day strategic stock of crude. If the inflow of crude is even 33% short of daily requirements and the refineries work at full capacity, the stock would be over in 48 days. After that, refinery output would have to be curtailed by 33%. That would mean a big shortage of energy in India with all the consequences for prices and production.If the crude reserves are maintained because they are needed for proper operations of refineries, India would be using only 66% of the requirements and there would be shortage of finished products right through the months.India’s private refineries export their product and in March 2026, this was about 27% of India’s production. Of the reduced inflow of crude, 27% was used for export. So, shortage of crude for internal consumption increased and only 40% of the imported crude was available for it. Force majeure could have been used to stop the supplies but private profits came in the way. Even 75 days later, exports of refined products have not been stopped.In the first scenario, shortages will hit hard after 48 days while in the second scenario, shortage would be all through. Since the government has maintained that there is no shortage for the last 75 days, it is in the first scenario and the country is now entering the phase of a big shortfall.Two things are clear, if tough steps had been taken from the beginning (suggested by this author in early March in these columns) and exports stopped, the situation now would not be entering a dire phase. Further, the longer the closure of the Strait, the deeper would be the supply shock for the world and India. Our heavy dependence on import of crude oil and gas and continuing to export refined products will hit us harder than other nations. Strait’s closureFor Iran, closure of the Strait of Hormuz is the trump card to secure its sovereignty. Even though many countries are pressuring it to allow free transit through the Strait, it is standing firm. Iran is using the closure to extract guarantees from the USA against future attacks. It has suffered heavy bombing twice in the last one year, when negotiations were going on. Therefore, it does not trust the US. Due to an impasse, it is unclear how long the Strait will remain closed.Countries started taking action to mitigate the supply shock in the first week of March itself, like rationing, price increases and work from home. India, as the second biggest importer of crude oil in the world, was particularly vulnerable and should also have taken these steps. But, the government announced in the parliament that India was well prepared to meet the challenge. However, given the world wide shortage, India could not procure the same quantity of crude as it got earlier. Foreign exchange reservesSince India’s trade and capital flows have been impacted, foreign exchange reserves have depleted by about $30 billion since late February. This pace may continue given the capital outflows due to withdrawal of FDI, FII and NRI deposits. Remittances are also likely to dwindle and exporters are likely to delay bringing back their proceeds while importers are likely to import more to take advantage of declining rupee. The decline in foreign exchange reserves needs to be checked, lest the rupee keep falling, leading to rise in imported goods prices and accelerating inflation.Under Liberalised Remittance Scheme (LRS), Indians are allowed to take out $250,000 a year for a variety of purposes. Why was this not stopped immediately in the first week of March? LRS remittances were about $25 billion in 2025-26. Even today, they have not been stopped. This could have saved much more foreign exchange compared to the appeal to stop going abroad and having destination weddings. It is the really wealthy who use LRS. They also have funds spirited abroad. If some essential items were allowed and the rest stopped, $15 billion could be saved.Gold imports are sought to be curbed. It is undoubtedly an unproductive investment and last year, India imported about 720 tons of gold valued at $72 billion. It is mostly purchased by the well off. Nearly 90% of Indians have hardly any savings to invest in gold. In recent times, it is more of gold biscuits and bars that have been bought for investment. The rich see gold as a hedge against bad times. If it is a safe investment, this will continue given the global uncertainty, decline of the rupee and the rise of inflation.Impact on different sectionsThe poor have been hit hard. They are already suffering due to the shortages and consequent price rise. The most visible fallout is the black marketing of cooking gas. This is not taken into account in the inflation data which is taken to be around 3.5%. Actually, for the poor, it is already 30 to 40%. Their consumption basket has shrunk to the essentials and it is the prices of these items that have shot up due to black marketing and shortages. The top 3% in the income ladder in India are well-off and have substantial black incomes. They indulge in wasteful expenditure and can cut back their consumption. Large savings are possible by cutting waste in government and checking the corporate sector’s five-star life style. So, instead of a generalised call for austerity, a more specific call to the well-off needs to be given.If actual prices and decline in output in the unorganised sectors are taken into account, the economy is in a stagflationary situation. The poor feel it with the loss of employment, erosion of incomes and actual inflation. With the stocks of petroleum products declining, prices will continue to rise and production in various impacted industries would keep declining. The danger is that the economy could enter recession. That there is a global shortage of petroleum products is reflected in the rise in petroleum prices. It is not just India that is affected.Leadership’s credibilityGiven the shortages, inessential production has to be cut back so that the essential production can be maintained to keep inflation in check, optimise output and support the marginalised. Sacrifices will have to be made by those who can.Asking for sacrifice will test the credibility of the leadership; whether people will follow their exhortation. Currently, trust is missing since the call for austerity is seen to be self-serving. Till the other day, big rallies and convoys were in evidence. Even the prime minister now using a two-car convoy is questionable. If security can be given with just two cars, then why the big convoys till now. Or, is the prime minister’s security being compromised. There is no answer to this.India has a massive black economy which finances foreign travel, luxury consumption, gold purchase, etc.. Business men complain privately that corruption is growing and involves the country’s leadership. A big part of the black income is spirited out of the country. The BJP has accused the leadership of the ruling opposition parties in the states of corruption – in Bengal, Tamil Nadu, Karnataka, Punjab, etc. The opposition parties accuse the ruling party of corruption. The ruling party has taken many opposition leaders into its fold, whom it accused of corruption, till they joined the ruling party. Did they suddenly turn honest? The well off in the country who can sacrifice are party to the widespread illegality in the country and/or know of it. Asking them to make sacrifices, when the political leadership is making money, will not work. It is hard to suddenly turn clean. Black economy is systemic and systematic and has become a part of business practices. Will the leadership work to change the systems and clean them up? Will they bring back the hordes of money kept abroad?The leadership delayed taking steps needed to tackle the crisis due to energy shortage. It claimed it was in control of the situation. During the pandemic as well it was claimed that things were under control when the Mahakumbh became a super spreader and many died during the Delta wave. Doses of vaccines were not ordered till January and Serum Institute had to export 60 million doses lest they get spoilt. Vaccination was initiated at such a relaxed pace that the population could not have been vaccinated for the next 10 years. As the Delta wave hit, the vaccination process was accelerated but many died. The massive waste in the corporate sector and the government has to be curbed. Thinking cannot be from election to election. Consensus is needed in the political class and the onus is on the ruling party. It cannot go around creating bad blood and then ask for consensus. To show positive intention, LRS and export of refined products needs to be stopped immediately. Appeal to bring back the stashed money abroad needs to be made. Indian businesses investing abroad need to invest more in India. Ambani plans to invest $300 billion and Adani has promised to invest $10 billion in the US. Can they be appealed? Distinction between essential and inessential has to be made so that the former can be sustained while curtailing the latter. Such real steps are required to meet the growing challenge.Arun Kumar is a retired professor of economics at JNU. He is the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020.