For years, Indians have been told that the economy is booming.
The world’s fastest-growing major economy.
The bright spot in a slowing world.
And despite unemployment, weak private sector investment and stagnant wages, the official message remains the same as it was three months ago: everything is under control.
Then suddenly, the Prime Minister came out asking people to use less fuel, avoid foreign travel, stop buying gold, and cut down on chemical fertilizers. Fuel prices were hiked, import duty raised, and more measures are likely to be announced.
That shift in tone raised questions
If the economy was fundamentally strong, why is the government suddenly asking citizens to cook with less oil or postpone their foreign holiday? Could just the ongoing US-Israel-Iran war have caused it?
But the reality is- this crisis did not begin with the war or the Strait of Hormuz disruption.
The war has merely exposed fundamental weaknesses that already existed, and which the government failed to tackle.
Let me explain.
Now before we go into all that, let me remind you.
India’s economy is much more than stock market numbers or GDP headlines. The real story lies in wages, jobs, small industries and everyday pressure people face long before a crisis.
At TNM, we believe these issues deserve deeper scrutiny. That is why we look beyond the headlines and break down what is really happening, exactly like what I am doing right now.
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Even before the Iran-Israel-US war began, the rupee had already been falling.
Foreign investors had been pulling money out for months. Exports were slowing. Worker wages had stagnated. Small industries were struggling. And beneath the headline GDP numbers, there were signs that India’s economic growth story was becoming increasingly uneven and fragile.
The West Asia crisis simply exposed those vulnerabilities all at once.
To understand what is happening right now, you have to start with India’s dependence on imports.
India imports roughly 85% of its crude oil requirements. It also depends heavily on imported LPG and fertilizer inputs. So when oil prices spike globally, India immediately feels the impact across the economy.
Economist Neelkanth Mishra estimates that every $15 increase in oil prices costs India nearly 1% of GDP. That is not a minor shock. It is the kind of increase that can slow growth across multiple sectors at the same time.
And higher oil prices create another major problem for India. The country suddenly needs far more dollars to pay for imports.
That is where the rupee crisis comes in.
Rupee has fallen to 96.3 per US dollar, and there are fears it could weaken further if oil prices remain elevated. But it has also significantly fallen against Srilankan, and Pakistani rupees and Bangladeshi taka.
But the important thing here is that the rupee’s decline did not begin after the war.
It had already been weakening steadily for months because foreign investors were pulling money out of Indian markets.
Why were they leaving?
Partly because global investors were moving toward sectors linked to the semiconductor and AI boom, especially in countries like Taiwan and South Korea. But there were also India-specific concerns.
Indian markets were seen as expensive relative to other emerging economies. Corporate earnings growth had slowed. Exports were weak. Consumption demand outside the top income groups was sluggish.
Former RBI governor D Subbarao recently warned that India is beginning to resemble the conditions seen during the 2013 crisis, when emerging market currencies crashed after global investors pulled money out.
The danger in such situations is not just the economic fundamentals. It is also market psychology.
Once investors believe the rupee will continue falling, panic starts setting in. Exporters delay bringing dollars back into India because they expect the exchange rate to worsen further. Importers rush to buy dollars before prices rise more. Investors hedge aggressively. Households begin buying gold and dollars as protection.
At that point, fear itself starts weakening the currency further.
But many economists now argue that India entered this crisis already vulnerable.
Ex-IMF economist Surjit Bhalla recently made a striking point. He said that even Indians no longer appear enthusiastic about investing in India.
And while headline GDP numbers still look respectable on paper, critics argue those numbers are hiding deeper structural problems inside the economy.
India’s growth has become increasingly unequal.
Some economists describe the post-pandemic recovery as “K-shaped”.
This means a recovery after a crisis, some people and businesses recover fast, while others keep struggling.
So the economy improves unevenly, with winners and losers at the same time.
Wealthier Indians recovered quickly after Covid because they benefited from stock market growth, financial assets and corporate profits.
Meanwhile, lower-income groups faced stagnant wages, insecure employment and rising living costs.
India’s own Economic Survey acknowledged that real wages for regular workers have actually declined over the past few years. Rural wages have either stagnated or weakened since the pandemic.
That means millions of Indians entered this crisis with very little financial cushion.
Now add inflation, fuel price hikes and slowing economic activity to that situation.
The pressure becomes severe very quickly.
The sectors feeling the impact most immediately are MSMEs and small manufacturers.
There are already reports from industrial belts around Delhi, Noida and Gurugram of workers quietly returning to villages because factories are slowing production or shutting down operations temporarily.
Even before the war, worker protests had already increased across industrial belts in Bihar, Haryana and Uttar Pradesh.
India’s Economic Survey itself had acknowledged wage stress. Export weakness had already been flagged repeatedly.
Which is why critics say the government’s response has come too little and too late.
The West Asia crisis began months ago. Oil prices had already started climbing. The rupee was already weakening.
Yet public messaging from the government remained largely optimistic until the Assembly election results were announced
Only then came the appeals for austerity.
The measures announced so far include raising duties on gold and silver imports, increasing LPG and CNG prices, signalling future fuel price hikes and asking citizens to voluntarily reduce consumption.
But many economists argue these measures are reactive, not strategic.
They may temporarily reduce pressure on imports or government spending, but they do not solve deeper structural problems
The government now also faces a credibility issue.
Citizens are being asked to reduce fuel consumption and avoid unnecessary travel, but political campaigns, roadshows and large public events continued uninterrupted through the election season.
Austerity appeals work when political leadership itself appears visibly restrained.
India now appears caught between two competing pressures.
On one side, the government wants to control the fiscal deficit and reassure financial markets. On the other, it also needs to protect households from rising fuel, fertilizer and food costs.
If the government cuts spending too aggressively while demand is already weak, the slowdown could deepen further.
People spend less. Businesses earn less. Factories slow production. Layoffs rise. Consumption weakens again. And investors will find it even more unappealing.
That cycle can become very difficult to reverse.
India still has substantial foreign exchange reserves, close to $700 billion. But as Subbarao warned, reserves alone cannot guarantee stability if investor confidence weakens rapidly.
And that brings us to the bigger question underneath this entire crisis.
Has India’s economic model fraying?
For years, India’s headline GDP numbers have been growing, the stock market has been booming and wealthy urban consumers have been spending. But manufacturing jobs did not expand at the scale required for India’s population. Informal employment remained widespread. Wage growth weakened. And economic gains became increasingly concentrated. This means the gap between the haves and the have not kept increasing.
As long as global capital kept flowing into India and oil prices remained manageable, those weaknesses were easier to ignore.
Now both those conditions are under stress simultaneously.
So how long could recovery take?
That depends mainly on oil prices, global financial conditions and the government’s policy response.
If the West Asia conflict relieves stress on Hormuz and oil prices fall below $90 a barrel within the next few months, India could stabilize over the next one to two years.
But if oil prices remain above $100 for an extended period, the situation becomes much more difficult.
A global slowdown would make recovery even harder because India would then face a dip in demand for its exports combined with continued capital outflows.
India is not on the verge of collapse. It still has significant strengths, including a large domestic market, strong services exports and substantial forex reserves.
But this crisis is exposing the gap between headline growth numbers and the underlying reality of the economy.
Because an economy cannot remain stable indefinitely if there are not enough jobs, wages stagnate, small industries weaken, and growth benefits only a narrow section of society.
And that is the real warning emerging from this crisis.
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