Austerity isn't the point. Energy security is

The prime minister’s list of measures to curb consumption of imported goods, mainly gold and oil, somehow got named “austerity” in the public discourse that followed. In economics the term is used somewhat differently, arising in the context of a crisis. I shall return to this point having first considered the PM’s proposals.

Restrictions on imports are quite standard when a country faces a balance of payments crisis, leaving it starved of foreign exchange. In India, gold is the go-to  store of value, reflecting the  underdevelopment of financial instruments historically. And even where financial instruments for saving exist the returns may not be inflation indexed. The lure of gold for an Indian household is that its value rises continuously with inflation. However, unlike in the case of the financial instruments, saving in the form of gold does not end up with investors. Saving in the form of gold is, therefore, a “curse” for India’s economy, as much potential purchasing power gets locked up, stifling the growth of  income. There is also the additional aspect that we produce next to no gold even as we display a voracious appetite for it. As gold imports are a leakage of demand, and, further, it is not an input into necessary production there is a case for reducing its import.

The case of oil  is altogether different from that of gold. It is the quintessential, intermediate input, entering  production   directly or indirectly. Thus, unlike with gold,  if there is less of it will lower output and employment in the economy unless  efficiency rises or substitutes are found. The same is true of LPG supplies. It has been said that  the current  shortages have  been forced upon India by the war in west Asia, but it is not clear that the government made any effort to secure oil from Russia and Iran, defying Trump’s sanctions.   Be that as it may,  there could be hardship ahead. If this is to be avoided, alternative sources of energy would have to be found. Domestically produced electricity would have to replace imported oil and gas. A shift to electric cars would be costly for India, for, unlike China, it does not have the capacity to produce them at scale, and will not come quickly, but a shift to electricity for cooking is entirely feasible. However, it is not a choice that can be made from Delhi. Electricity is generated at the level of the states. For decades, the state electricity boards have been forced to supply electricity cheaply, or at no cost whatsoever to select groups. It is questionable whether  they have the capacity  to rapidly ramp-up supply  of the electricity needed to replace LPG as the energy used  for cooking. The declining cost and rising availability of solar power in India is irrelevant . For instance, the Kerala State Electricity Board has conveyed that it does not have the funds to invest in the equipment needed to store the electricity generated by households.  Such funds would have to be found though, as geo-politics is likely to keep India under pressure while sourcing LPG globally. In fact, this is the perfect moment for India to strive for a dual energy transition, from foreign to domestic sources of supply and from fossil fuel to renewable energy sources. So, while the PM’s exhortation to households and firms to economise on oil and gold consumption to reduce India’s import dependence makes sense given the present global scenario, the government must lay out clearly how the energy from alternate sources needed to keep the economy functioning can be found. The government’s regulatory bodies have also been far too lax in bringing auto makers to heel by imposing energy efficiency norms  for cars produced in India. A leading car manufacturer has stated that it will be shifting its portfolio to large multi utility vehicles, which when not used to their maximum capacity are relatively fuel inefficient. It seems a war  was needed for the government to even recognise the importance of energy  security for India .

Finally, I  turn to a macroeconomic  aspect of austerity. The term entered the economics lexicon from the debate in the 1930s between John Maynard Keynes and Friedrich Hayek on how to deal with the Depression that had engulfed the western hemisphere and the economies linked to it. Austerity – had meant a compression of aggregate demand, ostensibly to revive the economy. Keynes had thought of this as the wrong thing to do then, for the Depression  reflected a shortage of demand due to the collapse of private investment. Hayek acknowledged the reduction in output that would follow austerity initially but thought it  necessary,to compensate for the excessive demand that  caused f the crisis. In India today, consuming making do with less  imported oil and cooking gas may be necessary but unless  substitutes are found quickly it is likely to lead to a loss of output. If such a loss  materialises it would come at the heels of  a comprehensive slowing of India’s economy  that commenced even before the war in West Asia. M. Parameswaran and I estimate that of the 11 sectors at the initial level of disaggregation of national income the majority have slowed after 2014, with only real estate growing faster.