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By:

Amey Chitale

28 October 2024 at 5:29:02 am

The Iran Crisis and India’s Gathering Fiscal Storm

As the war in West Asia continues to drive up crude prices and fiscal pressures, India’s economic resilience is being severely tested. AI generated image It has been nearly three months since the West Asian conflict began, and its ripple effects are striking us harder than the scorching summer sun in the subcontinent. The unfolding situation has already shaken the government’s risk management framework. For years, India benefited from a prolonged “Goldilocks” phase of economic stability,...

The Iran Crisis and India’s Gathering Fiscal Storm

As the war in West Asia continues to drive up crude prices and fiscal pressures, India’s economic resilience is being severely tested. AI generated image It has been nearly three months since the West Asian conflict began, and its ripple effects are striking us harder than the scorching summer sun in the subcontinent. The unfolding situation has already shaken the government’s risk management framework. For years, India benefited from a prolonged “Goldilocks” phase of economic stability, which helped cushion temporary disruptions. Yet no modern economy is built to withstand relentless external shocks whether from unending wars or recurring natural disasters. Growth flourishes only in an environment of peace and stability. India’s vulnerability to turmoil in West Asia is hardly new. From the oil shocks of the 1970s to the Gulf War of 1991 and the Iraq conflict of 2003, every major disruption in the region has rattled India’s balance of payments, fuelled inflation and forced difficult fiscal trade-offs. Despite decades of diversification, the Indian economy remains deeply exposed to the geopolitics of energy chokepoints such as the Strait of Hormuz. Cost Cutting With the conflict unresolved, Prime Minister Modi has urged citizens to practice self-restraint, reviving COVID-era habits like remote work, virtual meetings, reduced travel, and deferring gold purchases. These steps aim to cut fuel imports, ease transport inflation, conserve foreign exchange, and safeguard India’s Rs. 690 billion reserves. Digital operations and limited travel also lower congestion, emissions, and business costs. By curbing crude demand, the country can soften inflation and free resources for infrastructure and welfare. This demand-side discipline complements RBI’s interventions, offering immediate relief while renewable transitions remain long-term. Its success depends on how faithfully citizens adopt it. To curb inflationary pressures, the government reduced excise duties on petrol and diesel to offset soaring crude oil prices and kept fertilizer costs in check despite conflict-driven surges. These measures, however, have strained public finances and derailed the 4.3 percent fiscal deficit target. At its 623rd meeting in Mumbai, the RBI Board approved a record surplus transfer of Rs. 2.87 trillion to the Central Government for FY2025–26, surpassing last year’s payout of Rs. 2.69 trillion. This marks the highest dividend in the bank’s history, offering temporary fiscal support amid severe external shocks and reinforcing the RBI’s role as both monetary authority and stabilizer. The payout reflects strong financial performance, with net income before provisioning rising 26.3 percent from Rs. 3.13 trillion in FY25 to Rs. 3.95 trillion in FY26. Expenditure grew 27.6 percent, gross income 26.4 percent, and transfer to the Contingent Risk Buffer (CRB) surged 143.8 percent to Rs. 1.09 trillion. The RBI’s balance sheet expanded 20.6 percent to Rs. 91.97 trillion. Strategic Interventions This surplus was driven by strategic interventions and favourable global dynamics. Large-scale forex operations - nearly $180 billion sold to defend the rupee - generated trading gains as dollar holdings were liquidated at high valuations. Elevated global interest rates boosted returns on foreign debt and currency assets, while a 10 percent dollar depreciation and 60 percent gold rally enhanced reserve values. Domestically, Rs. 9 trillion in government securities purchases expanded the balance sheet and interest earnings, while sovereign swaps moderated currency depreciation. Under the revised Economic Capital Framework, the CRB was set at 6.5 percent of the balance sheet, down from 7.5 percent, to maximize surplus transfer during geopolitical stress. With the balance sheet expanding sharply, this required a larger nominal allocation of Rs. 1.09 trillion. A higher buffer would have reduced the dividend, while a lower one could have unlocked over Rs. 3.5 trillion but would have left the RBI exposed. The chosen balance safeguards resilience while still delivering a record payout. This payout provides crucial non-tax revenue support to the Government. In the Union Budget, total dividends from PSUs, banks, and the RBI were projected at Rs. 3.16 trillion. The current payout amounts to 90.8 percent of the projections. While PSU banks like State Bank of India and Life Insurance Corporation of India add would receipts, falling oil PSU dividends will be offset, keeping the budgeted targets intact. Yet fiscal strain persists. To shield farmers, the government-maintained urea price controls, absorbing global cost increases. As a result, the fertilizer subsidy bill for FY27 is projected to rise by Rs. 70,000 crore to Rs. 2.41 trillion marking a 40 percent jump, thereby offsetting gains from the RBI’s record transfer. The full impact of the ongoing war is yet to unfold, but it is already clear that the government will miss its fiscal deficit target of 4.3 percent, which was premised on average crude oil prices of $85 per barrel. Every $10 increase in crude prices widens the deficit by about 40 basis points. With crude currently hovering around $100, the fiscal strain is expected to be considerably higher, pushing the deficit well beyond initial projections. Alternative Measures As the evolving global scenario is beyond India’s control, several policy adjustments merit attention. First, sourcing and supply chain diversification should be deepened by maintaining the shift toward Atlantic Basin crude and Russian imports, while securing long-term LNG and fertilizer feedstock agreements outside the Strait of Hormuz. Second, the continuous pursuit of the reform agenda remains essential. Third, dynamic subsidy management and exploration of direct benefit transfer options for subsidy disbursement are necessary. The government should also concentrate on accelerating adoption of high-efficiency alternatives like Nano Urea that can reduce bulk chemical imports and ease fiscal pressure without undermining crop yields. On the monetary front, RBI’s use of its Rs. 690 billion reserves and swap operations has helped moderate currency volatility, but persistently high crude prices above $120 per barrel and continued rupee weakness may necessitate policy rate hikes to anchor inflation expectations. Aligning these monetary measures with government-led energy conservation is vital to safeguarding India’s external balance and macroeconomic stability. The trajectory of the West Asian conflict is in uncertain terrain. Even in the best-case scenario of hostilities ending soon and the Strait of Hormuz reopening, supply chains would take at least three months to normalize. This disruption has already slowed India’s growth momentum in the first half of FY27, posing a significant hurdle to the Viksit Bharat mission. The ongoing crisis has once again exposed structural fault lines in the way India’s economy has evolved. While the country has shown resilience against international pressures, it remains far from achieving the kind of global economic dominance that China commands. The government continues to push forward with reforms, but these efforts have yet to gain the full traction and recognition they deserve. Amid these challenges, RBI’s strong institutional framework has proven to be a critical shield, helping stabilize the economy during external shocks. Without a realignment and reinforcement of the domestic ecosystem, the vision of a Viksit Bharat will merely remain an aspirational one. (The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)

Gun Violence in America

Updated: Jan 2, 2025

Gun Violence in America

On December 16, 2024, tragedy struck Abundant Life Christian School in Madison, Wisconsin, where a 15-year-old student, Natalie Rupnow, fatally shot a fellow student and a teacher before taking her own life. Six others were injured, with two in critical condition. This devastating event is a grim reminder of the United States' ongoing struggle with gun violence, particularly in schools.


A Long History of Gun Ownership in America

The issue of gun violence in the United States cannot be discussed without acknowledging its deep-rooted history of gun ownership. The right to bear arms is enshrined in the Second Amendment of the U.S. Constitution, adopted in 1791, which states: “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”


Initially, this amendment was intended to empower citizens to form militias for self-defense during a time when standing armies were distrusted. Over the centuries, however, the interpretation of the Second Amendment has evolved. Today, it is often cited as a justification for individual gun ownership, a concept reinforced by landmark court cases such as District of Columbia v. Heller (2008), which affirmed an individual's right to own firearms for self-defense.


Gun culture is deeply ingrained in American society, with nearly 400 million firearms in civilian hands—more guns than people. This level of accessibility, coupled with a powerful gun lobby led by organizations like the National Rifle Association (NRA), has made significant legislative reform difficult.


Gun Violence in Numbers

According to the Centers for Disease Control and Prevention (CDC), firearms cause approximately 40,000 deaths annually in the United States—equivalent to 109 deaths per day. This figure includes homicides, suicides, and accidental shootings. Among children and teenagers, firearms are now the leading cause of death, surpassing motor vehicle accidents.


School shootings are a particularly horrifying aspect of gun violence in America. Since 1990, there have been over 800 incidents in K-12 schools, resulting in more than 500 deaths and over 1,000 injuries. High-profile tragedies such as the Columbine High School massacre (1999), the Sandy Hook Elementary School shooting (2012), and the Marjory Stoneman Douglas High School attack (2018) have shocked the nation and the world, yet meaningful reforms remain elusive.


A Global Comparison

The United States stands out among developed nations for its high rate of gun violence. In countries like Australia, Canada, and much of Europe, strict gun control measures have significantly reduced firearm-related deaths. For example: By contrast, the firearm-related death rate in the United States is 12.2 per 100,000 people, significantly higher than other developed nations. The prevalence of guns and the lack of uniform gun control laws contribute to this disparity.


Challenges in Addressing Gun Violence

Efforts to reduce gun violence in the U.S. have faced significant obstacles. One of the most notable is the prohibition of federal funding for gun violence research. In 1996, Congress passed the Dickey Amendment, effectively barring the CDC from studying gun violence as a public health issue. Although the funding ban was partially lifted in 2019, its legacy has left the country with a limited understanding of the causes and solutions to gun violence.


Advocates have long called for measures such as:

• Universal Background Checks: Closing loopholes in gun sales to ensure that all firearm purchases are subject to background checks.

• Safe Storage Laws: Requiring gun owners to store firearms securely to prevent unauthorized access.

• Bans on Certain Firearms: Prohibiting the sale of assault-style weapons, which are often used in mass shootings.


The Debate Over Gun Rights and Reform

The debate over gun control in the United States often pits the rights of gun owners against the need for public safety. Opponents of stricter gun laws argue that restrictions infringe on constitutional rights and fail to address the root causes of violence, such as mental health issues. Proponents, however, point to the success of gun control measures in other countries and the overwhelming public support for policies like background checks.


A Way Forward

Despite the challenges, there is growing momentum for change. Grassroots organizations, survivors of gun violence, and some lawmakers are advocating for comprehensive reforms. The Madison school shooting serves as a stark reminder of the urgency of these efforts. As the nation grapples with its gun violence epidemic, it must look to both its history and the experiences of other countries to find a path toward a safer future.


(The author is a resident of US. Views personal.)

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