Govt must think beyond fiscal consolidation, focus on productive spending, says RBL Bank Chief Economist Rangan

The current geopolitical crisis in West Asia, driven by the Iran war and the closure of the Strait of Hormuz, has sent crude oil prices soaring and continues to hurt the global economy. With the Indian economy also being significantly impacted, Anitha Rangan, Chief Economist at RBL Bank, feels the challenge is not only an effect of the war but a result of the current account deficit. In an interview with Fortune India, Rangan says instead of focussing too much on short-term emergency measures, the focus should be on strengthening structural fundamentals. Edited excerpts:

How serious is the West Asia crisis for the Indian economy? Is it temporary, or could it turn into a deeper, longer-lasting problem?

The current geopolitical crisis led by Iran war is not a crisis for the Indian economy itself but for the world as such, for all the economies.

Not only India but also other countries—including Thailand, Malaysia, the Philippines, Pakistan, and China, among others—are facing problems primarily because of oil-related pressures. 

For example, recently, the US inflation print came in at 3.8%. So even the US economy and its consumers are facing problems, and Europe, of course, especially the UK, is facing even more challenges than India.

So in that sense, I would say that this is a challenge. For India, particularly, the challenge comes predominantly from the current account deficit front. Now, the current account deficit is not something that has happened because of the West Asia war. This problem had been building up for the last two years.

FDI flows were slowing down, and net FDIs and FPIs were also weak for the last two years… It actually started around October 2024, when the US began its rate hikes and India started building its negative forward book.

From $44 billion, it went up to $88 billion in February 2025, and now we are sitting at around a $100 billion negative forward book. The problem started then, but it was not acknowledged or fully understood.

People thought that once oil prices came down and the US started cutting rates, things would improve. But it actually got worse. Also, because gold prices were rising, the issue was not visible in the forex reserves. People thought $700 billion of forex reserves was strong, but out of that, $120 billion was gold.

Because of the rise in gold prices and the impact on valuation, the fact that foreign currency assets were actually stagnant, or declining, was not understood over the last two years.

So this is a structural problem that existed long before. What has happened now with the West Asia situation is that it has only made the challenge more severe than it would have been otherwise. Even without it, we would still have had a negative balance of payments.

Is India more vulnerable to the current crisis because it is a large economy and imports around 90% of its energy needs?

Every country is equally exposed in such a situation. If you look at oil-to-GDP ratios, India is somewhere in the middle among Asian economies. Some countries are even more vulnerable than India.

If this FDI and capital account problem had not existed, we would not have been as vulnerable.

While reserves are being used to defend against volatility, if the volatility exists for long then the reserves cannot be the only tool as the supply of reserves is not endless. India and the world have faced over four big shocks in the last six years, and India has defended each shock well, only strengthening its structural position. However, in the process, some tactical challenges have emerged, like capital outflows along with rising CAD, which need to be addressed.

India has always been somewhat unique in that reserves are built not from current account surplus but capital account surplus. Capital account surpluses have helped India so far in all these years. But as economies mature, capital flows are part of the process. However, as India’s CAD still remains in deficit, in such geopolitical tensions, the rupee becomes the natural vehicle of adjustment.

What fiscal measures should the government prioritise to support growth while maintaining discipline?

The good part about India is that our fiscal discipline is much better than that of most countries. If you look at the US or Europe, their debt-to-GDP ratios are above 100%, whereas India’s is around 80%.

So in such a situation, there is no need to panic about fiscal consolidation. Compared to other countries, India still has some fiscal leeway.

In an emergency, the government should not worry too much about strict fiscal consolidation and should instead focus on productive spending. If the government reduces its capex, which it has been doing consistently, it could hurt growth.

Certain measures will be required, like MSME support, excise duty cuts, and possibly more steps. Revenue may also be affected due to margin compression and slower corporate tax collections.

There may also be pressure from the rural side due to factors like El Niño, so agricultural support may be needed. But some fiscal slippage at this stage is acceptable and should not be a major concern.

What realistic policy options does the government have without straining public finances?

See, as I said, a little bit of fiscal leeway will not be seen as a significant negative at this point, especially since most countries are facing similar situations.

If the government continues what it is already doing, even with some fiscal slippage, it should be fine.

For example, MSME credit guarantees are being provided. Even in the past, allocations were around ₹9,000–10,000 crore, and actual spending was not excessive.

Just because MSME support is announced does not mean the entire sector will default. These measures are mainly to support credit growth.

Similarly, export support and customs duty relaxations are being provided for selected sectors. These are targeted and temporary measures until the situation stabilises.

 What options does the Reserve Bank of India have to manage rupee volatility?

At this stage, the RBI is doing a fine balance as much as possible. However, the rupee is likely to have a depreciation bias.

Since the RBI now has limited reserves, it is using other tools to attract foreign exchange. At this point, the focus should be on strengthening structural factors.

For example, despite challenges, India is actively signing FTAs. These agreements are more comprehensive now, covering goods, services, investments, and other areas, and they provide better market access.

These structural steps will strengthen the economy over time.

In the short term, measures like FCNR deposits, faster FDI approvals, and moderation of discretionary imports like gold can help. However, most imports, apart from gold and some electronics, are essential and cannot be reduced significantly.

Fertiliser imports are becoming costly. What can the government do to prevent stress in agriculture?

Firstly, the issue is not availability but cost. Around 50% of the requirement is already available.

India produces about 80% of its urea domestically and imports only 20%. Other fertilisers like DAP and MOP come from countries like Jordan and Morocco.

So the question is not availability, but who bears the cost. The government is currently bearing it.

In FY23, fertiliser subsidies rose significantly, and a similar situation may arise again. The budgeted amount is around ₹1.8 lakh crore, and it may increase further.

Farmers are unlikely to bear the burden, as the government will step in.

At the same time, promoting nano fertilisers and natural alternatives can reduce dependence. Setting up biogas plants in rural areas can also help, as they provide both energy and fertilizer output.

How does the current situation compare with the Taper Tantrum situation in 2013?

We cannot compare this to 2013. At that time, India’s structural resilience was much weaker.

The current account deficit was around 4%, whereas now it is closer to 1–2%. Fiscal conditions are also much stronger now.

India’s growth rate remains one of the highest globally, around 6.5%, and it is still the fastest-growing major economy.

India’s global standing has improved significantly. It is now one of the largest economies, and its ability to negotiate trade agreements and manage external relations is much stronger.

So overall, macroeconomic stability has improved considerably over the last decade.

To limit the economic pains caused by the current crisis, what are the five key measures the government should take now?

First, continue capex spending and do not cut productive expenditure. A little fiscal slippage is acceptable.

Second, use this crisis as an opportunity for energy diversification, including renewables and biogas.

Third, continue focussing on FTAs, as they will strengthen trade and external stability.

Fourth, increase focus on attracting FDI and improving capital flows.

Fifth, fast-track internal reforms like GST rationalisation and labour reforms to strengthen long-term growth.

The external environment will remain uncertain, as we have seen multiple shocks since 2020. But India has remained resilient. Instead of focussing too much on short-term emergency measures, the focus should be on strengthening structural fundamentals. There is no need to panic, as India is in a better position than many other economies.