Listen to this article:

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.

Fossil 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........

© The Wire